After five lean years, gold miners gear up for growth
For the first time in five years, Barrick Gold (ABX.TO) and other bullion miners are getting ready to expand, breaking from their monologue on cutting costs and debt because of tumbling gold prices.
Backed by healthier balance sheets, a 17 percent rise in the price of gold since January to $1,244 an ounce and new investors, miners from Canada to Australia and South Africa are studying ways to raise production.
At the world’s biggest gold miner, growth was not a priority in recent years, said Rob Krcmarov, Barrick’s vice president of exploration and growth, as the company sold assets to reduce its $14 billion debt by 40 percent.
“Now some of our investors are starting to ask us: what is next?,” Krcmarov said. Barrick created a “growth committee” in March to evaluate in-house projects, exploration opportunities and acquisitions.
Early signs of activity include Kinross Gold’s (K.TO) March decision to expand its Mauritanian gold mine. In May, Goldcorp paid C$520 million ($406.44 million) for a gold project in Canada’s Arctic.
“What the sector will see is smaller, bolt-on type projects, brownfield expansions of existing mines. That’s going to account for the bulk of growth in new investment in the space,” said BB&T Capital Markets analyst Garrett Nelson.
Over the past half-decade, many mining companies have pared debt and overhead to build cash flow, that can be used to boost output, along with rising prices.
Such balance sheet improvements have attracted investors who once again see promise in gold stocks, including billionaire George Soros.
Shares in gold miners have soared this year with the Philadelphia Gold and Silver Index .XAU up 98 percent versus a paltry 3.5 percent increase in the S&P 500 Index .SPX.
Still, with lingering memories of the last bull run’s overpriced mine builds and acquisitions that stretched balance sheets, producers are keeping watch on volatile gold prices which peaked at $1,920 an ounce in September 2011.
“At this stage, it’s largely talk and discussion and trying to get people to recognize that they do have these options in the portfolio,” said Stephen Land, who manages Franklin Templeton’s Franklin Gold and Precious Metals Fund.
Barrick and others such as Australia’s Evolution Mining say growth means more than just adding production – ounces must be profitable at a range of prices.
“We want to be a company that prospers through the cycle and not just when the gold price is going up,” said Evolution Executive Chairman Jake Klein.
Gold prices began dropping sharply from late 2012 as concerns about global inflation fell, reducing bullion’s value as a hedge against rising prices.
Funding for exploration fell with gold prices, meaning there are “slim pickings” when it comes to acquisitions, said David Garofalo, the Chief Executive of Canada’s Goldcorp (G.TO).
“The reality is, the best bang for the buck seems to be on the internal opportunities,” he said.
One such case is Newcrest Mining, Australia’s biggest gold miner.
Newcrest has its hands full with expansion plans at existing assets, and while the company is “not blind” to larger scale M&A opportunities, it is “not a major focus” right now, said CEO Sandeep Biswas.
By focusing on early-stage projects, Canada’s Agnico Eagle Mines (AEM.TO), which doubled 2015 exploration spending from the previous year, can reap more profit from its investments, CEO Sean Boyd said.
Still, securing new supplies is critical: after seven years of gains, gold production will fall for the next three years, Thomson Reuters GFMS data shows.
Some miners will be tempted to make acquisitions.
Advanced projects and newly-built mines that can supply “instant ounces” are likely to be popular targets, said Cassels Brock & Blackwell mining lawyer Paul Stein.
Evolution and South Africa’s Sibanye Gold (SGLJ.J) have said they might be looking to buy.
($1 = 1.2794 Canadian dollars)