Mining Companies Wary Of Gold Rally Price Surges Generate Interest, But Producers Proceed With Caution

Nothing moves a mining stock quite like a precious metals rally.

Gold and silver prices surged in late January and early February, buoying local mining stocks and rekindling memories of the 1970s when the metals’ prices broke through the stratosphere.

Gold reached 5-year highs and silver briefly hovered near $6 an ounce, a level reached just one other time this decade and a price where mining companies can make most any silver mine profitable.

While mining doesn’t move the Inland Northwest economy as it once did, a run-up in gold and silver still gets the blood pumping for investors and miners alike.

“We do get a lot of calls from interested investors when we see increased metals prices,” said Vicki Veltkamp, manager of corporate communications for Couer d’Alene-based Hecla Mining Co. “They want to know more about the company.”

That type of investor affection gives a warm glow to the stock prices of the region’s halfdozen major mining companies. Sustained gains in metals prices could heat up the companies’ quarterly earnings.

Already this year, Asarco Inc. and Coeur d’Alene Mines Corp. have announced plans to jointly reopen to two idled silver mines, at least partially because of the rally in metals prices.

But amidst all this good news, the atmosphere in the executive offices of local mining companies remains restrained and calm.

Mining veterans know the markets are fickle, and they’ve long since learned not to plan or spend on the basis of short-term hikes or dips in metals prices.

“Miners by nature are in this business for the long haul,” said Tim Olson of the Northwest Mining Association in Spokane. “For every two weeks of run-up in the price of metals, we’ll see three, four, five weeks of them going down. Every time someone says ‘hey, gold’s up $1.50, those mining companies are making money again!’ I just want to stop them …”

A market that could skittishly plunge on a single purchase of metals futures by Arabian oil sheiks keeps a short leash on executives’ expectations.

And not every mining stock responds the same way to price fluctuations. The rally’s or fall’s timing in relation to where a company lies on the development food chain makes all the difference.

Take Hecla, more than 100 years old with developed silver and gold mines. The most recent rally pushed its stock to near $9.50 after hovering around $8 a share for most of January.

With most of the company’s value tied to the metals it owns in the ground, Hecla’s earnings and hence its stock are directly tied to gold and silver prices.

Producers like Coeur d’Alene Mines Corp. and Pegasus Gold Inc. are also mature, metal-producing companies with millions of ounces of reserves that make them subject to similar stock swings.

Spokane’s Gold Reserve Corp. also saw its stock price rise with the metals rally, but not for the same reasons as the other companies.

Investors are interested in Gold Reserve’s Brisas gold mine in southeastern Venezuela, said A. Douglas Belanger, a vice president and company spokesman.

While Gold Reserve’s stock has increased from $6 to about $9 this year as metals prices have risen, the company has seen similar and even larger swings based on legal and exploration reports related to the Brisas property.

Even without the gold rally, Belanger believes the stock would have risen simply from speculation about the Brisas property.

“It ranks right up there as one of the world-class gold discoveries,” he said.

At last estimate, about 4.7 million ounces of gold was buried at Brisas, along with 7.5 million tons of copper. The company should make a decision whether to build a mine there by year’s end, Belanger said.

Even when gold dropped $6 an ounce on Tuesday of last week, Gold Reserve still rose 88 cents to close at $8.88, mostly because investors liked the Brisas site potential, Belanger said.

While mining executives try to be rational about price swings in the metals markets, they realize some investors aren’t. Speculative investors can capitalize on both rises and falls in the metals markets by playing mining stocks.

The mechanics of how investors drive up or sell off stocks based on what metals prices do are somewhat simple. If prices drop, the metals a mining company owns are worth less, and hence the company is worth less, and vice versa.

But it’s price increases that pose the most difficult decisions for executives. Optimism can become contagious. If metals prices rise, a mining company’s metals cache is worth more. The prospect that mining companies - always searching - could find more precious metals drives stock expectations even higher.

In the case of Coeur d’Alene Mines., its stock rose 24 percent in January alone while gold’s price rose only 5 percent and silver’s only 9 percent, said Tony Ebersole, spokesman for the Coeur d’Alene-based company with silver and gold mines domestically and in overseas hot spots like Chile.

During this time, the company announced that Silver Valley Resources Corp., its joint venture with Asarco Inc. of New York, would reopen the Coeur and Galena silver mines. That announcement revived dormant hopes of a mining revival in North Idaho, although company officials warn that no long-term promises have been made.

This inherent uncertainty of metals markets makes the job of handling investor relations for a mining company a roller-coaster affair. Often, the winds of the metals market can toss the ships of even the most prosperous mining companies.

More difficult yet, minor setbacks or unexpected events can send a company’s stock reeling, regardless of metals prices.

Hecla knows this all too well. Its November announcement that a promising gold mine, Grouse Creek, would not perform as expected sent the stock tumbling from about $9 a share toward $6.

The company took a $97 million write-down to remove the lost investment from its books. But it usually takes an announcement of that magnitude to equal the amount of calls that higher metals prices bring, Veltkamp said.

As for the gold and silver rallies themselves, prices fell off last week for both metals. However, many analysts say the precious metals prices could continue to creep upward because of long-standing disparities in how much gold and silver are produced and how much consumers need.

“We’re still very bullish on both gold and silver,” said Ted Kempf of the CPM Group Ltd. in New York.

“The market is paying attention to the fundamentals this time,” Ebersole of Coeur d’Alene Mines said. “There’s been less supply for gold than what the amount gold fabricators want worldwide for seven years, and silver has always had a good story to tell in that area. We think it’s a good sign we can sustain this.”

, DataTimes ILLUSTRATION: Graphic: Metals stocks on the move

MEMO: This sidebar appeared with the story: MARKET OUTLOOK Prices fell last week for silver and gold. But many analysts say precious metals prices could continue to creep upward because of long-standing disparities in how much gold and silver are produced and how much consumers need.