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Tips from TurnKeyMasters: Let's go for the gold

By: Malaquias Encarnacion

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Apr 6, 2009 - In according to Jeffrey Nichols gold prices will move to new historic highs well above the $1030 level touched a year ago March.

From the Power Plants brokers’ standpoint, that statement means at least two basic things:

1) Gold mines will need to run more often at peak production rates (a higher capacity factor), maybe by keeping more production lines running for longer, and

2) Some other mining companies will add brand new production lines for the permanent regime.

It's very unlikely that mining companies start exploiting new mining projects right away (because of the higher prices) as many people would say, but they will run the current projects at higher production rates instead (ie more tons per hour). This is a high investments industry, and strongly regulated, so they will go for new developments in some point, but is going to take a time before the have it worked out and ready.

In the other hand, each local branch is normally committed to meet the production numbers set by the guys at the Headquarters, and their local salary compensations are linked to the production (mining companies normally have performance bonuses based on the production levels delivered). Likewise, due to its nature, gold mining is an energy intensive activity, which you cannot increase by adding more people only, but you need to add more processes/hours that will turn out in more power requirements.

Bottom line is: in either case, mine companies would need to reinforce their generation capacity, due to the high costs associated to any fault/interruption in the power supply side (including the lost of potential bonus). Likewise, as gold prices skyrocket, they may be tempted to go and try to get new generation up and running ASAP so most of them would be looking for Gas Turbines, Power Barges or any other "Fast-Delivery" option (they have seen too many Dominos Pizza’s advertisings).

From our experience, when trying to get fast generation, many companies overlook the final generation costs of different technologies (focus on cheap power rather than chep energy) and this is the main reason why the project never happens. They keep saying "money isn’t an issue for this project", but here’s the fact: in MW’s Power Plants Projects money is always an issue!!!!.

To illustrate this, the cost to generate 1MWh with a gas turbine could be 4 times higher than the same MWh generated by a Steam Power Plant based on Coal, but due to the hurry, companies/agents weighted fast delivery better than lower energy costs, and at the end of the day, the proposal (the numbers it contains) end up killing the project: Sooner or later, it will be rejected by the one of the layers or stakeholders of the project.

Our recommendation in these cases is simple: getting a low houred or "as new" unit, based on a cheaper technology/fuel as Heavy Fuel Oil or Coal. You get fast delivery (the plant is already built), fast deployment (if need power right away, you can also rent temporary power during the construction), and the convenience of a larger unit (lower energy prices, integration with other processes, etc). Obviously, since the cost of the MW of a GT is quite lower than the same MW with Coal, then the cost of the capital and the risk aversion limits set by the stakeholders should help deciding whether having a higher-investment, lower-energy cost solution (Steam Units) or getting into a lower investment-"kill me later" deal as the one offered by the GTs. At the end, the period of evaluation for power projects is so long, and the interest rates are so low, that 3-5 years more at the end of the cash flow in the spreadsheets are practically negligible

I know, I know, it depends on the price of the fuels and the type of contract they have, but for many developing countries fuel prices are a horror movie.

Bottom line, to identify potential sources of Power needs around the globe, one of the tools you may use is keeping track of new developments across all others industries complimentary (or large customer) to the Power Industry. You may agree with me that due to the high energy intensity seen in the gold industry, we may considered it as a complimentary industry to Power Plant Sales (as the gold prices skyrocket, we sell more plants), so you should be diggin in the gold reserve map .

The maps normally show current projects, or proven reserves but as I said before, when prices rise, mining companies increase their production from their current projects, instead of going to new developments. So In these maps, you could see some places where high power demand sources may rise in the mid term.

It must be said though, that not all the "exploitable" gold can be traded at spot prices since most of the companies may be highly hedged through take-or-pay and other types of contracts. My take is that only 20-40 % of the total production would be tradable at spot prices. So another good indicator to refine the research is finding the difference between the max production level of each company and their total capacity contracted. Additional, we should be able to figure how many gold contracts traded in the forward markets would be physically executed.

That’s what I call real Market Intelligence, so please be intelligent.

Keep tuned, more tips to come.

Author:
Malaquias Encarnacion - TurnKeyMasters

Malaquias is Market Director with AES Corp (company No. 180 in the Fortune 500 list) and Business Engineer with TurnKeyMasters (www.turnkeymasters.com). he has a long experience promoting power projects in Developing Countries. To read more about his carrer and projects visit: www.visualcv.com/malaquias

Article Source: http://depositarticles.com/

Malaquias is Market Director with AES Corp (company No. 180 in the Fortune 500 list) and Business Engineer with TurnKeyMasters (www.turnkeymasters.com). he has a long experience promoting power projects in Developing Countries. To read more about his carrer and projects visit: www.visualcv.com/malaquias

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