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Weak Dollar Is Golden for Mining Companies

They don’t call it the Mega Pit for nothing.

Gold Bars
AP
Gold Bars

Three miles wide, one mile across, and 800 feet deep, the main pit at Newmont Mining’s Twin Creeks mine is so big that it makes the giant trucks that haul 20-ton loads of ore out of the pit round the clock look like Tonka toys.

But “mega” can also refer to the riches in the pit. With gold trading at record highs, this is one valuable piece of property. And Newmont is mining it for all it is worth.

“Produce all you can, as fast as you can, at the lowest cost you can. That’s the formula,” said Newmont President and CEO Richard O’Brien in an interview. “Our trucks run 24 hours a day, 365 days a year.”

That is, except for once a day, when all the trucks are moved up to the rim of the pit, and the workers move to safer ground. The two-way radios, normally chatterboxes, fall silent. Then comes the word.

“Fire in the hole,” the radio crackles.

And with that, the giant section of the pit where they were mining 10 minutes earlier bursts into a giant puff of smoke. It takes a couple of seconds for the sound of the explosion to reach the rim of the pit, but then, a roaring “BOOOOOOOM!”

Minutes later, the trucks are back in the pit, scooping up the earth the explosion broke loose.

This is modern-day gold mining — a far cry from the picks and shovels of old. Today’s record gold prices have created a 21st century gold rush.

“Gold is coming back as an investment class,” O’Brien said.

One of the biggest drivers is the U.S. dollar, weakened substantially by the growing federal budget deficit. The prospect of further weakening has investors flocking to gold.

O’Brien said he worries about the long-term effects of a weak U.S. currency. “It’s not a good thing to have a weak U.S. dollar and have the rest of the world in a place where, in some ways, they blame us for the financial crisis.”

He believes the dollar will eventually rebound, which means the price of gold will likely retreat. But he does not see that happening in the near term, because of the deficit.

“With the printing presses on, people are anticipating inflation,” O’Brien said. “That inflation will probably lead to higher gold prices, because it will lead to a weaker dollar.”

O’Brien believes gold could hit $1,300 next year.

That helps explain all the activity at the Twin Creeks mine, one of 14 gold mines Newmont operates in Northern Nevada, the nation’s most prolific gold mining region. All of Newmont’s mines — in Nevada and around the world — are operating non-stop.

But the giant pits and the daily blasts are just the beginning of an enormously complex process to turn mountains of rock into solid gold.

Golden nuggets and veins of gold are, for the most part, long gone. Most modern-day gold deposits consist of microscopic particles, no bigger than the particles in cigarette smoke.

Pick up a handful of the dirt they scoop out of the pit, and you won’t see so much as a sparkle.

“Just by looking at it, you don’t know if it’s got gold in it,” said Tim Pike, Production Supervisor at Twin Creeks.

Winterizing Your Portfolio - A CNBC Special Report
Winterizing Your Portfolio - A CNBC Special Report

The ore is brought to giant mills, where it is ground to the consistency of flour. It is then taken through a multi-step process, including steam-pressure heating in giant autoclaves, the largest such devices in the world, according to Newmont.

Then, roughly once a week, the molten gold is poured out into the familiar gold bars. They move approximately 190,000 tons of earth each day, which yields only a few thousand ounces — or a few bars — of gold. These days, it is worth the effort. A single, 70-pound bar of gold is currently worth more than $1.25 million.

But even at those prices, gold is in high demand. The World Gold Council reports worldwide gold demand in the third quarter reached 800.3 tons, up 15 percent from the second quarter. Demand is down from a year ago at the height of the financial crisis, but Newmont’s Richard O’Brien says gold is now being purchased by central banks, which were in the past net sellers. He believes the weak dollar as well as currency weakness elsewhere will spur even more demand.

“The great thing about gold as a currency is that you can’t make more of it. We have to go mine it. And nobody owes a debt against gold,” O’Brien said.

Newmont’s stock, along with that of other gold mining companies, is trading near 52-week highs. The high gold prices create a huge profit margin for gold companies. Newmont estimates it costs about $800 to mine an ounce of gold — leaving more than $300 an ounce in pure profit. The company earned $388 million or $0.79 per share last quarter on record revenues of $2 billion.

But many investors also use gold stocks as a proxy for investing in gold, pushing stock prices even higher. Others invest in gold-based exchange traded funds or ETFs, or they buy gold coins or bullion outright.

Still, others worry about a gold bubble, warning that the sharp rise in prices is vulnerable to a strengthening U.S. dollar. That helps explain the torrent of ads offering consumers ways to sell their gold, at gold fairs or home-based gold parties.

Not surprisingly, O’Brien does not recommend selling, but says, “If you are going to sell it, there are lots of people out there who think gold is a great investment and you’re probably going to get a fair price for it.” But he quickly adds, “A year from now, you’re going to regret it.”