Evaluating Fundamentals of the US Gold Industry

Introduction In 1969, the US devalued the dollar. This action, over the ensuing four years, resulted in the deregulation of the price of gold. It also resulted in the rebirth of the US gold mining industry. The extreme inflation of the 1970s led to a dramatic increase in the price of precious metals. Consequently an increased interest in the exploration for and mining of gold has occurred. The enthusiasm began among the few existing producers who had survived on marginal profits during a prolonged period of fixed prices and constantly rising costs. Then came the newcomers. They saw the opportunity to enter an industry that historically had been characterized by small operations with low capital costs. It was not until the late 1970s that large mining companies recognized that investment in gold projects could generate cash flows that previously were associated only with world class deposits. Today, gold mining has tremendous appeal for the entire mining community, despite the dramatic price drop from 1980-81 levels. There are even major firms with no mining experience attempting to gain a foothold. But how easy is it to enter the US gold mining industry? What are the basic factors that influence the economics, and what are they likely to be for the remainder of the decade? How has the industry changed, and what is the composition of the active companies? An examination of the industry will help to answer these questions. US Gold Mining History The current gold rush is actually the fifth in the 208-year history of the US. The first recorded commercial mining of gold occurred in the Southeast in 1799. It produced from small, yet relatively rich placer deposits. The famous California gold rush of 1848 placed the US as a major producer with 62.2 t (2 million oz) of output by 1850. More than 93.3 t (3 million oz) was mined by 1853, equivalent to 63% of world production. But the richest placers were soon depleted. By the end of the Civil War, annual production had declined to well below 62.2 t (2 million oz). The government then relaxed prices and the industry again began to recover. The 1870-80s saw the great mines of the California Mother Lode and Grass Valley brought into production. This was followed by development of Nevada's Comstock, which later became one of the world's largest producers. Discovery of gold at Cripple Creek in 1892, coupled with technological advances in the use of large dredges in the California placers, resulted in significant production increases. And, with the expansion of the Homestake mine at Lead, SD, in 1898, US output again surpassed the 93.3-t (3 million-oz) level. By 1905, produc¬tion climbed to 124.4 t (4 million oz) with the addition of the Alaskan deposits, new output at Goldfields, NV, and the introduction of the cyanidation process. During World War I, the government forced the shutdown of gold mines. By 1920, total production had dropped to little more than 62.2 t (2 million oz). Many mines remained closed until the Great Depression. This, combined with the devaluation of the US dollar in 1934, resulted in a gold price increase to about $1.13/g ($35 per oz). Then began the fourth gold rush. By 1937, output had again surpassed 124.4 t (4 million oz). This was due to an increase in primary production and new byproduct production from base metal operations. Unlike the previous period of growth, however, this period was short-lived. The imposition of Executive Order L-208 in 1942 once again forced the shutdown of most mines. At the end of World War II, cumulative US gold production had