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Digging Deep into Intermediate Gold Miners’ Geographical Exposure

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Sep. 28 2016, Updated 7:06 a.m. ET

Geographical exposure

Due to rising taxes, royalties, changes to mining codes, and asset nationalization in the last few years, many big gold projects have been rendered uneconomical. This is why investors and miners have become wary of the geographic exposure to risky mining jurisdictions. The first half of 2016 reiterated gold miners’ (GDX) (SGDM) focus on attractive mining jurisdictions.

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Focus on attractive mining jurisdictions

Agnico Eagle Mines’s (AEM) geographical exposure is mainly restricted to safe mining jurisdictions. It operates mines in Canada, Mexico, and Finland. It also has exploration and development activities in the United States. These countries are generally politically stable and supportive of the mining industry. Among its close peers, AEM has one of the best geographic exposures in terms of safe and stable jurisdictions.

New Gold (NGD) has an attractive geopolitical profile. All its assets are in the top five mining jurisdictions of Canada, Australia, the United States, Chile, and Mexico. These jurisdictions have good infrastructure and are politically stable. About 85% of NGD’s reserves are based in Canada.

Higher geographic risk

The majority of Iamgold’s (IAG) revenues come from the African region. IAG has mines in Burkina Faso and Mali in Africa. In 2Q16, ~50% of its revenues came from Africa. Iamgold is facing issues in mines in Africa due to the prevalence of hard rock, which drives up the costs.

In addition, there are political disturbances in Burkina Faso. Approximately 41% of its revenues came from Suriname in South America. In 2015, the company endured several work stoppages due to an illegal strike at this mine. In addition, the company’s costs at this mine are also high due to lower grades and hard rock.

Iamgold is awaiting the necessary permits to start work on the Côté Lake Gold project in Canada. This could be one of the core assets for the company going forward, as it intends to grow in the Americas to balance its geographical profile.

Eldorado Gold’s (EGO) relative underperformance in 2016 is mainly due to its relatively risky geographical profile. Political uncertainty in its operating areas of Turkey and Greece have led to an overhang on its shares. While ~93% of its production in 2Q16 was from Turkey, the rest was from Greece.

In May 2016, Eldorado Gold announced the sale of its remaining China assets, thus exiting China. It is expected to use the $600 million in proceeds to grow its business. It could start a project in Brazil, which could improve its geographical profile going forward.

Next, we’ll look at the outlook for gold miners’ production growth.

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