Several miners have hefty headwinds in front of them due to legal and tax challenges coupled with a potentially peaked (for now) gold spot price. Thus, it could be a weak quarter for Agnico-Eagle (NYSE:AEM), Barrick (NYSE:ABX), Newmont (NYSE:NEM), Freeport (NYSE:FCX) and Vale (NYSE:VALE), specifically.
Agnico-Eagle Mines can now add a class-action lawsuit to the long list of troubles stemming from the fiasco at its Goldex mine in Quebec. A law firm called Siskinds LLP is planning to file a class action suit against Agnico-Eagle on behalf of stock holders, the Toronto Globe & Mail newspaper reported.
Siskinds filled preliminary paperwork for the lawsuit in Ontario provincial court in March. The documents allege that Agnico-Eagle failed to disclose the amount of risk it was taking by mining underground at Goldex in Val'D'Or, Quebec. Some of Agnico-Eagle's executives are apparently named in the suit as well. The Globe & Mail did not reveal the identities of the executives named.
The suit was filed on behalf of everybody who bought Agnico-Eagle Stock between March 26, 2010 and October 18, 2011, according to the Siskinds website. Neither the site nor the Globe & Mail article mentioned how much money the lawyers are seeking, and it. It did not say if they would be suing on behalf of American stockholders.
Instead, the law firm seems to be collecting the names of potential plaintiffs, so this could be just a fishing expedition to see how much money the lawyers could make. From the little information available, it is hard to see how this potential litigation could affect Agnico-Eagle or its operation.
The Goldex Mine shut down in October 2011 after volcanic rock in the underground facility fractured. These fractures led to floods, which stopped operations. Agnico-Eagle has taken a $161.5 million Canadian tax write off on the Goldex closure. So far, there is no word on when Goldex will reopen or if it will reopen. The problems also caused the company's stock to fall in value by 18%.
There are apparently around 1.6 million ounces of gold in reserve at Goldex and 13 million tons of broken ore underground in the mine. Agnico is studying new ways of getting at the gold there, including digging a new tunnel in from the other side. The company spent nearly 40 years developing mining operations at Val'D'Or and only operated for three years before last year's fiasco.
This suit could further hurt Agnico's stock value which seems to have recovered from the fiasco. The big damage would not be from a judgment but from the attorneys' allegations that Agnico executives misled investors about potential problems at Goldex. If people in the markets start believing these claims that could cause another big drop in Agnico Eagle stock.
It could hurt gold and mining stocks in general if investors start have having doubts about other miners. Contributing to these doubts are the reported rising costs at a number of the major gold miners.
Gold Mining Costs Rising Faster than Earnings
Escalating development costs could cause Barrick Gold and Newmont Mining to stop or scale back major gold and silver projects.
Bloomberg Businessweek reported that Barrick is reviewing the cost estimates for its Pasuca-Lama mine on the Chilean-Argentine border. That's corporate doublespeak for it might not be profitable to go forward with it. Part of the reason for the high costs at Pascua-Lama could have to do with the project's altitude; its local is between 12,468 and 17,061 feet above sea level. The current price tag for the mine is around $5 billion.
Newmont may have to raise the price on its controversial Conga mine in Peru. Conga has been held up by protests over water and political opposition, Business Week reported in the same article. The cost estimates at Conga are now around $4.5 billion.
There's no way that this kind of rising expenses can not affect stock prices. Barrick in particular is very vulnerable because of its planned expenditures at Pascua-Lima. Given the rising production costs and the falling gold prices, there may be no way that the company can make money at the project. Expect to see this company's stock prices fall and soon.
Gold Price Falls for Third Straight Month
Rising costs are not the only problem facing gold miners; April 2012 was the third straight month in which the price of gold fell. It is too early to tell if this is the beginning of a trend, but falling prices and rising costs are not a good combination for any company.
We will have to wait and see how investors react to this, but Forbes noted that it is the first time since 2001 that gold has fallen for three straight months. So it's going to be new territory for a lot of gold investors. It's going to be interesting to see how they react to this development.
Generally when the gold price falls, the price for gold producers is not far behind. Falling gold prices could drive investors that see gold-related companies as protection against market volatility to sell. Most investors bought into miners on the expectation that gold will continue to rise. If it continues to fall, expect a major sell-off in gold mining stocks, especially the stock of lesser producers such as Barrick, that bet heavily on expensive new mines.
Indonesia puts 20% tax and severe restrictions on Metals Exports
Indonesia has slapped a 20% export tax on copper, gold, nickel, and 11 other metal ores, according to Reuters. The country's government is also planning to put severe restrictions on mining companies that don't build smelters in Indonesia.
Energy and Minerals Minister Jero Wacik told reporters that no company will be allowed to export raw material unless they submitted a roadmap to build a smelter. Reuters speculated that this regulation is designed to shut down small mining companies. These companies don't share their profits with the Indonesian government like Freeport-McMoRan.
The biggest miner in Indonesian, Freeport McMoRan, which operates the huge Grasberg mine in Papua, New Guinea, would not be affected by the regulation because it already owns a smelting company in Indonesia. It could conceivably be hurt by the tax because Grasberg is Freeport's largest operation. There is currently no tax on mineral exports in Indonesia, Reuters noted.
The new tax will also affect tin, bauxite, silver, lead, chromium, iron ore, and manganese. The tax could lower the supplies of some of these minerals by halting exports by some small producers. It could also push those producers to export through the black market, which could make ascertaining Indonesia's level of mineral production harder.
Indonesia has also imposed a ban on the export of raw tin, another move that could increase black market shipments of that metal out of Indonesia. One big problem facing tax collectors is that Indonesia is an archipelago of islands, so it would be presumably easy to smuggle out ore. So the tax may have less impact on the world's mineral markets than the politicians and bureaucrats in Jakarta expect.
The tax will apparently go into effect on May 6. There is no word on how it will be enforced.
Newmont's people in Indonesia announced that the tax will not affect its operations in that country. Newmont has a copper concentrate mine on the island of Sumbawa. Vale mines nickel on the island of Sulawesi through its PT Inco subsidiary.
It is possible that Vale, Newmont and Freeport's operations in Indonesia, could be protected by the Contract of Works agreements that allow them to operate mines in the country. These apparently provide some protection from tax increases.
There is also a possibility that some sort of compromise will be negotiated between the Indonesian government and the mining companies. Foreign miners pump a lot of money into Indonesia's treasury, but they are politically unpopular in the country. The government could simply be trying to give itself more leverage as it tries to negotiate new deals with the miners. Some of the Contract of Works Agreements will apparently expire in the new future.
Foreign miners in Indonesia are also facing a new requirement that at least 51% of their operations be Indonesian owned in the near future. So far, the changes to Indonesian law don't seem to have affected Freeport's plans to expand its Grasberg operations.
It must also be noted that Indonesia's miners unions, which have become increasingly militant, may not like government policies that kill off their jobs. Grasberg was hit by a three- month strike last year and another round of labor unrest and violence in March. The main issue in the labor dispute was higher wages.
If miners start getting laid off, the union activists may redirect their anger towards the government. The miner's union has not weighed in on the government policies yet, but its opinion could have an influence, particularly with Indonesia's next presidential election scheduled for 2014, and the current president, Susilo Bambang Yudhoyono, barred from re-election by term limits.
Bad news for foreign miners in Indonesia has been piling up for the last few months. Sooner or later, all of the news reports about the hostile political climate, increased regulation, violence, and labor unrest have got to affect stock prices. The most vulnerable company here is obviously Freeport which is heavily dependent on Grasberg.
The only thing protecting Freeport stock values could be the US media's tendency not to report on the situation in Indonesia. If the anti-mining sentiment in Indonesia starts getting wide media coverage in the US, Freeport's stock value could take a nose dive. The impact on Vale and Newmont stock values is harder to ascertain because their investments in Indonesia are far more limited.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.