How Are Miners Making Money at Today’s Prices?

Often opposed by environmentalists because it uses cyanide, heap leaching is pitched by the mining industry as a fully matured, safe method. But as the saying goes, it only takes one bad apple to spoil the bunch, and over prior decades more than a few lazy mine operators have polluted enough rivers to tarnish the entire industry's reputation.

Bathing in toxic chemicals
Where permitted and environmentally approved, heap leach mines require lower up-front costs to build. Production costs are as low as any other mining method. Heap leaching minimizes financial risk and maximizes profits for the mining stocks able to pull it off. As you can see below, crushed ore is piled on top of the impermeable liner before taking a cyanide shower.

For fear of cyanide and other toxic chemical spillage, heap leaching operations should only be allowed in deserted hot climates where rainfall is limited; this leads me to believe that mines and resources located in desert environments may deserve a premium.

Thoroughly crushed?
Barrick Gold (NYSE: ABX  ) and Kinross Gold  (NYSE: KGC  ) each share 50% ownership of the Round Mountain mine, located in the high desert of Nye County, Nevada,. Since achieving commercial production in 1977, over ten million ounces of gold have been produced here. The area averages just five to seven inches of rainfall each year, limiting the risk of cyanide runoff outside the contained area. After thorough crushing, the majority of low grade ore (below 1 gram of gold per tonne) is placed on one of four dedicated leach pads. From there, gold goes through a recovery circuit, before eventually being poured as dore. Combining Nevada's sub-5% tax rate with $717/oz cash costs at Bald Mountain, the mine would be profitable as a stand-alone. Barrick and Newmont have floated the idea of working more cooperatively in Nevada. In my opinion, what's left of the market would have an appetite for a "Nevada focused" spinoff.

Here's where heap leaching goes wrong
Each round of leaching takes a few months. Then a fresh layer of ore is put on top of the containment area (leach pad). Handling and safekeeping of the tailings (leftover material contaminated with cyanide) is where most heap leaching operations screw up. Dams are constructed to hold the toxic waste. Sadly, over history too many of these dams have been structurally unsound. Tailings dam failures have caused roughly three-quarters of mining accidents over the last 25 years. Gold Fields (NYSE: GFI  ) is a disgusting example of why heap leaching should be outlawed anywhere near river systems.

Stay in the desert where you belong!
It only takes one cyanide spill or tailings dam break to ruin the surrounding areas drinking water for decades. Goldfield's Tarkwa mine is a sad story in recent heap leaching history, averaging one major cyanide spill every two years or so since 2001. Located in southwestern Ghana, an area that looks lush and tropical compared to the deserts of Nevada, Mexico, and Turkey -- places where heap leaching operations are less threatening to the environment.

More where that came from
Sadly, a strong profit motive tends to win against environmental concerns most places, especially Ghana. Goldfield's said it produced 719,000 ounces of gold from Tarkwa (a heap leach) last year at cash costs of $673/oz. With an estimated 10 million reserve ounces still in the ground, I'm predicting more cyanide spills in southwestern Ghana's future.

Keeping it clean
Fingers crossed, let's hope SilverCrest Mines' (NYSEMKT: SVLC  ) Santa Elena and Eldorado Gold's (NYSE: EGO  ) Kisladag continue to serve as examples of profitable heap leaching operations that don't ruin the surrounding environment. Recognized as one of the lowest cost producing mines (junior and senior), Santa Elena is located near Hermosillo, Sonora, Mexico. SilverCrest is processing high-grade ore of 4 grams gold per tonne. At the Scotia mining conference, SilverCrest's management indicated that all-in costs would drop below $13 (per silver equivalent ounce). Cash flow from the heap leach operation is funding its transition to a mill scenario by mid-2014.

Still profitable at today's prices
Owned and operated by Eldorado, Kisladag is the largest gold mine (open pit, heap leach) in Turkey. Over the last seven years, cash costs at Kisladag have fluctuated between $189 and $365 per ounce. Eldorado's net income was down by 50% quarter over quarter, but still a positive $36.4 million. As a low-cost producer, partly thanks to heap leach mining methods, Eldorado was still able to scrounge up $0.12 to be distributed as a dividend for 2013 (roughly a 2% yield at today's prices). To my knowledge, there have not been any environmental costs/damage due to heap leaching at Santa Elena or Kisladag – no excuses Goldfields.

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