Gold Assets in Brazil

Gold Assets in BrazilBy Dave Brown —Exclusive to Gold Investing News

Brazil is not an especially new gold-mining frontier, but renewed activity across its vast stretch of territory is quickly moving this country back up the charts.  Although the mining industry only contributes to less than 5 percent of gross domestic product, the country has a number of world class deposits of iron , copper, nickel, manganese, tin, tantalum and gold spread through its expansive geological terrain. Brazil was the world’s biggest gold producer when it was Portugal’s colony in the 1800s.  The country is still investing in increasing its gold mining industry to offset a decline in the production from earlier mining settlements, also known as ‘garimpos.’

As recently as 1990, Brazil produced over 100 tonnes of gold but for a variety of reasons production dropped off to under 40 tonnes by 2005.  In 2008, Brazil became a net external creditor and two ratings agencies awarded investment grade status to its debt. With gold prices high, a mature gold infrastructure, a stable first-world government, relatively favorable mining-friendly laws, and some material discoveries in recent years, Brazilian gold mining and exploration is enjoying a renaissance.

Last year, Brazil was the fourteenth biggest producer of gold with production of approximately 50 tonnes representing approximately 2.1 percent of global mining of the yellow metal in 2009. The measured and indicated gold reserves in Brazil may offer investors an attractive value proposition with the USGS estimating 2,000 tonnes, or approximately 4.3 percent of the world’s reserve. The estimates for Brazil could be of significant interest as the total reserve estimates are actually larger than those in neighboring Peru, which occupied the position of the sixth largest nation in terms of gold production last year, with China, Australia, South Africa, USA and Russia finishing slightly ahead.  In the most recent edition of the Fraser Institute annual mining survey, Brazil was tied with Peru for twelfth out of the 72 global jurisdictions in terms of mineral potential.

Brazilian deposits are primarily located in the states of Minas Gerais (48 percent), Pará (36.9 percent), Goiás (6 percent), Mato Grosso (3.6 percent), Bahia (3 percent) and others (2.5 percent).

Investment Considerations

The principal gold producing companies in Brazil are: AngloGold Ashanti (NYSE:AU), 32 percent of total production; Yamana Gold (TSE:YRI), 27 percent; Kinross Gold (TSE:K), 17 percent; and others, including the garimpos, representing 24 percent of the total.

Amongst these other miners is Jaguar Mining Inc. (TSE:JAG) relatively aggressively targeting the exploration, development and operation of gold producing properties at its 72,000 acre land base in the Iron Quadrangle region of Brazil, a prolific greenstone belt for more than 300 years in the state of Minas Gerais that has produced significant quantities of gold from open pit and large-scale underground mining operations.  In December 2009, the company acquired the Gurupi Project from Kinross. Jaguar Mining also has a joint venture agreement with Xstrata (LON:XTA) to explore the Pedra Branca Gold Project in the state of Ceará, in northeast of Brazil. The joint venture has mineral rights totaling approximately 159,000 acres.  A cautionary note for investors will be the relatively high cash costs in the operations combining for the first quarter of this year to average production costs of $597 per ounce, which may infer relatively lower quality ore bodies.

Colossus Minerals (TSE:COL) is an exploration and development stage company focused on a high-grade gold, platinum and palladium metals project, which could be of potential interest to investors.  The company has a 75 percent ownership in the Serra Pelada project, situated in the mineral prolific Carajas region in the Para State.  Serra Palada was discovered in 1979, and hosted the largest ever gold rush in Latin America. During the 1980s, up to 80,000 artisanal miners, also known as garimpeiros extracted an estimated 2 million ounces of gold plus platinum and palladium, from a 400m x 300m x 100m hand-dug open pit.  The cessation of bedrock mining in the area has been the result of a series of flooding and pit wall collapses since the late 1980s.

Outlook

Despite a marginal growth in real terms in 2009, some analysts estimate that the Brazilian mining sector will experience strong growth in the near future.  By 2014, the mining industrial complex could be expanding by around 4.8 percent a year in real terms and could reach a value of $46.4 billion, an increase of around 87 percent, compared with 2008.

Calls to introduce tax cuts for mining companies have been rebuffed by the authorities and in November reports from Reuters indicated the potential of an increase on royalties. This will be a topic of careful consideration as the mineral exploration spending and objectives outlined by the Brazilian Ministry of Mines and Energy anticipates a total of $1.5 billion in projected investment to be allocated to gold mining over the next three years. Investment plans currently being implemented by some of the biggest investors include:

AngloGold Ashanti has submitted an investment plan for $350 million, the aim of which is to expand production capacity at its mines in Cuiabá and Lamego, both located in the Brazilian state of Minas Gerais. As a result of these investments made during the next three years, total annual production is expected to increase from the current 5.2 tonnes to 8.5 tonnes per year.

Yamana Gold, which controls two mining companies in Bahia, says it will invest more than $407 million over the next two years. Its objectives are focused on the expansion and maintenance of its businesses in the state, including the implementation of a new unit in the municipality of Santaluz.

Kinross Corporation, which owns a gold producing operation known as Rio Paracatu Mineração, is investing $540 million in an expansion project intended to triple its production in Brazil.