Meridian's Chilean mine keeps costs low

Meridian Gold officials take great pride in their status as one of the lowest- cost gold mining companies in the world but they worry that investor expectations for their future performance may be unrealistic.

The company, headquartered in Reno's South Meadows area, last month reported earnings of $11.3 million that's 15 cents a share on sales of $34.3 million in this year's second quarter.

Both the earnings and sales are up from the income of $10 million the company posted on sales of $27 million in the comparable quarter a year ago.

The big story continued to be Meridian's cash production costs, which averaged $79 for each ounce of gold it mined.

How low is that? Newmont Mining Corp.

the world's biggest mining company, hopes to keep its cash costs at $180 an ounce this year.

Barrick Gold Corp., another big producer, reported cash costs of $162 an ounce last year.

Meridian's cash costs are so low largely because of the quality of its El Penon mine in Chile.

That mine produced gold at a cash cost of $29 an ounce in the second quarter.

"It's almost like producing gold for free," says Alvaro Belevan, a senior financial analyst for the company.

Meridian's other major gold production its 30 percent of the Jerritt Canyon mine 57 miles northwest of Elko produced gold at an average cost of about $229 an ounce last quarter.

(AngloGold owns the other 70 percent of the mine.) Meridian's share 28,240 ounces of the higher-cost Nevada mine's production last quarter was dwarfed by the 83,854 ounces produced in Chile.

That, in turn, resulted in the average cost of $79 an ounce.

At the same time that Meridian's cash costs have been low, the price of gold has been rising.

Gold's recent price of $320 an ounce is about $40 over the price at the start of this year.

And that has gotten the attention of some big investors willing to make big bets on the company.

Morningstar reports that about 21 percent of Meridian's shares are owned by mutual funds.

Fidelity Select Gold's holdings of Meridian, for example, accounted for more than 8 percent of the fund's holdings late last month.

And Meridian's price-earnings ratio of about 31 as calculated by Morningstar is well above the PE of 19.8 for the industry as a whole.

Its price to sales ratio of 10.6 compared to 3.0 for the industry also may reflect investor enthusiasm for the company.

For its part, Meridian tries to dampen some of the expectations.

Belevan says the company's costs at the El Penon property will begin creeping up as it moves into less-productive gold deposits that require more processing to produce an ounce of gold.

Over the life of the mine, he says, the Chilean mine probably will produce gold at a cash cost of about $50 an ounce.

And that's gold that's sold without being hedged in the futures markets.

Belevan notes that Meridian's low production costs mean it doesn't need to protect itself from a steep drop in gold prices.

Its unhedged positions allow Meridian to catch the full benefit of rising prices but it also leaves the company subject to downdrafts when prices fall.