Sunday, 5 August 2012

Failures in the Senior Gold Miners

The recent departures of Chief Executives at major gold miners points to failures in the industry and perhaps more to weak share price performances over the past few years relative to gold.
The XAU:Gold ratio tells the tale

Aaron Regent was pushed out at Barrick and Tye Burt from Kinross, as discussed below, pointing especially to cost over-runs at major projects.

Burt's nemesis has been the cost over-runs at Tasiast in Ghana, incurring large write downs, but ultimately these could be highly productive mines. Of more concern the Aurelian acquisition in Ecuador has not moved through permitting and may struggle to demonstrate returns due to tax costs. As identified here a number of times assessing "Jurisdiction risk" is critical.

Meanwhile Barrick have also seen cost over-runs but I would point to the $7.66bn acquisition of Copper miner Equinox as a bigger failure, diluting the gold focus of the company.

An excellent presentation here by Nick Holland the Chief Executive at Goldfields explores the issues further
In Holland's view the majors who succeed will

  • Provide leverage to the gold price, using debt well
  • Grow volumes and margins
  • Focus on capital discipline
  • Return cash and dividends to shareholders
  • Earn the right to spend investor's money wisely.
  • Believe in higher gold prices >$2000 / oz but understand the marginal oz returns.
The challenges are that good deposits are getting harder to find, mine grades are falling as existing resources are exploited to the maximum. 
The inflationary aspects of gold's price rise have also seen input costs for miners rise, oil, construction costs etc.
There is much to commend the Royalty companies who take a royalty from the top line and are unaffected by costs, leverage is offered by mining of new resources, this has been a popular investment theme however the leverage over physical is limited compare to miners in a strong bull market, royalty companies are more of a "safety" trade in the sector.
As the bull returns the winners will be those positioned for growth to supply against high gold prices.

Scott Wright at Zeal considers the health of the mining sector

Pointing to research from Metals Economics (MEG) and the NRH review linked in the previous post here Wright points to the scarcity of quality new deposits.
MEG point to discoveries falling behind production despite high capital raisings from the exploration sector.
Rick Rule has suggested that discoveries will come from the investment cycle and acquisitions will feature heavily. Ultimately I feel the majors need to see their stock prices increase to improve the value of their paper for acquisitions the M&A will follow.

Ultimately the juniors making high quality discoveries are key to the industry.
As we see a turn in gold prices the miners and juniors will be valued for cashflow but ultimately for assets, ounces in the ground in good jurisdictions.

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