Now that there''s profit in mining, what to do with the cash?

By Steve James
Reuters
Thursday, November 18, 2004

a href=http://www.reuters.com/newsArticle.jhtml?type=topNewsamp;storyID=6857584...

NEW YORK -- Now that they're raking in profits from
sky-high metals prices, mining companies face the
question of what to do with all that newfound cash.

Some are looking to the future by plowing money back
into exploration projects to find new deposits of the
copper, zinc, or alumina needed to feed China's
industrial beast.

Or they are looking to buy smaller, so-called quot;juniorquot;
companies, prospecting for gold and other precious
metals.

And some are shelling out bigger dividends, which
are guaranteed to please investors in the short-term.

But fund managers with investments in mining stocks
and analysts who follow the industry were split on
Thursday over how the money could best be spent.

quot;I believe it will be an interesting indication of
management -- who has quality management and
who doesn't,quot; said Chip Hanlon, domestic strategist
for Euro Pacific Capital, a $300 million fund with
some 10 percent invested in mining.

quot;I would like to see the funds put back into very
productive uses or paid out as dividends.quot;

Peter Spina, who runs specialist Web sites
GoldSeek.com and SilverSeek.com, said companies
like Newmont Mining Corp. must reinvest in exploration
in order to remain viable. quot;Investors want to see
dividends, but I think in the short-term they are happy
to see growth in increased production.quot;

Jay Taylor, who publishes the newsletter Gold and
Technology Stocks, said dividends were good only
if miners did not find new projects that would give
them returns when copper and other metal prices
fell. But quot;investors will reward you for dividends;
they are looking for dividends.quot;

Frank Holmes, chairman and chief executive of U.S.
Global Investors, who overseas $1.4 billion in assets,
was more skeptical. Many gold miners are not exactly
awash in cash because they operate in foreign
currencies, which have rallied faster than the price of
gold, he said. And in the lean years, they mined
lower-grade ores in order to survive.

quot;They have been starving for cash for the last five years
and when they finally have free cash flow, the costs of
energy and fuel have gone up,quot; Holmes said.

He said he favors companies looking for new projects.
quot;Exploration is the lifeblood. It's like biotech companies,
which must invest in Ramp;D since products have a life
cycle.

quot;Mining is the same model. The companies that
perform the best are the ones that are finding more
ounces than they are producing. Dividends are not
so important.quot;

Indeed, a recent survey showed mining companies
put aside more than $3.5 billion this year to hunt for
gold, copper, and other metals -- the biggest purse
of exploration dollars in seven years and nearly 60
percent more than last year.

Higher metal prices were the driver of exploration
budgets in 2004, said the Metals Economics
Group, a Canadian mining consultant.

With the price of gold at 16-year highs and copper
and nickel prices near 15-year peaks, large producers
are posting profits again. Last month, Newmont, the
world's biggest gold miner, increased its quarterly
dividend by 33 percent, and Freeport-McMoran
Copper amp; Gold Inc. said it will raise its dividend 25
percent.

Euro Pacific's Hanlon said he liked to see companies
build cash reserves. quot;It's easy to make mistakes when
you've got a little cash burning a hole in your pocket.
I am a big fan of companies being slow to put cash to
use.

quot;The very productive uses could be making acquisitions
in other companies or sites. As for exploring, why do it
yourself? Just buy the exploratory companies!quot;

Spina said that between 1997 and 2003, exploration
budgets were slashed dramatically. quot;Now we see a lot
of money flowing back into exploration and opening up
new mines, as well as cleaning up balance sheets.quot;

But Taylor warned fortunes can turn as quickly as the
metal prices fall. quot;Companies have had to shut down
when the copper price fell. There are big problems with
big mining projects that cost a lot of capital and take
time, and then the commodities move down on you.

quot;With indebtedness in the United States there could
be problems for the big mining companies taking their
cash and putting it in the ground,quot; he said.

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