The Latest Moves of Gold Miners
The world’s largest mining show, PDAC, attracted more than 24,000 people to Toronto last week, compared with over 22,000 in 2016 – a strong indication that confidence has returned to the mineral exploration and mining industry. This reflects a gold sector in sync with the underlying trend of recent months and price performance to date, even given the overhang of a possible rate hike.
The key themes emerging in the gold sector today are continued cost and debt reduction and a more disciplined focus on growth going forward.
Debt Reduction:
As gold has recovered (though still subject to the usual volatility between possible interest rate hikes and the aftermath of quantitative easing), gold companies – especially the major producers – have reduced debt and improved their balance sheets substantially. They continue to focus on improving their financial health as they prepare for growth or re-growth.
One small-scale example of this continued effort is Goldcorp’s recent sale to new entrant Leagold of its Los Filos Gold Mine in Mexico for US$350 million, of which US$279 million will be paid in cash and US$71 million in common shares of Leagold.
Cost Reduction:
The price of gold started falling from its peak in 2011. This drove producers to reduce their all-in sustaining cost (AISC) to maintain profitability, conserve cash or simply to survive. Inevitably, there is a limit to cost reduction, and the AISC has been creeping up on some of the producers. All five largest producers managed to adjust to lower gold prices with effective cost reduction programs over the down cycle from 2011 to 2016. The graph below shows annual AISC since they have been reporting it. Anglo Gold and Kinross saw their costs creeping up, while Newmont and Goldcorp’s reductions were slowing. Barrick alone was able to further pare down costs, even in 2016.
This reversal of cost reduction was also reported at the BMO conference (attended by 281 metal, mining and fertilizer companies) a few weeks ago. Major gold producers see their costs beginning to climb in the next couple of years, as they increase investment to improve the medium-term outlook of their operations. It is entirely understandable that in survival mode, sustaining capital may have been reduced to conserve cash and deliver profits. Certain efficiencies and sustaining exploration programs were likely traded off for short-term results. Now that the worst is over and there is more clarity to the future, it is natural that some catching up is necessary, increasing costs.
Re-focused Growth:
With the gold sector’s turnaround, investors will be looking to growth expectations as a key metric.
In the rush to lower part of the cost curve, a number of actions are required. Other than cutting sustaining costs, high grading, or shutting down low grade and unprofitable mines, may be effective ways to achieve the desired results. This will reduce production output.
As a general observation, declining production has been a trend in the sector. Of the five largest gold producers, three (Barrick, Newmont and AngloGold) showed declining production over the last six years, while Goldcorp and Kinross were relatively flat (with the exception of Goldcorp in 2015).
In addition, due to the cutback in exploration, reserves have been declining during the down cycle. To re-ignite growth, gold companies are now increasing their exploration budgets, acquiring advanced projects and investing in earlier-stage exploration projects run by junior companies.
In line with this growth strategy, Goldcorp acquired Kaminak and its Yukon-based Coffee project in May 2016 for C$520M, and subsequently an approximate 20% interest in Independence Gold, which owns a neighbouring property. Similarly, Newmont is investing in GoldStrike in Canada’s Yukon Territory, spending US$39.5M to explore and develop its Plateau property, thereby joining the world’s biggest gold miners.
So far, mergers and acquisitions (M&A) have been cautiously executed, which is typical in the early-stage recovery of a cycle. M&A deals are few and sensible. Even the medium-sized producers are maintaining high standards of acquisition criteria, focusing on developing an organic growth strategy rather than paying a high premium to acquire assets.
All in all, it is encouraging to see the steady recovery of the gold sector and the disciplined approach by mining companies to re-build the growth profiles of their operations. Hopefully, this will translate into solid values in preparation for the sector’s uptick in the new cycle.