National Post (National Edition)
Gold projects back on table
PRICES ON RISE
For years, Toronto-based Iamgold Corp. had been studying the cost of building its Côté mine in northeastern Ontario, but shareholders often pushed back because of the high price tag associated with construction, estimated at about $1.1 billion.
Last August, then-chief executive Stephen Letwin said construction costs made it “just a non-starter.”
“I would say, the message has been loud and clear from our shareholders,” Letwin said during a conference call at that time. “We want smaller projects, less capital-intensive projects” than Côté.
Less than a year later, the project is back on the table and looking more likely as the price of gold surges above US$1,800 per ounce — an altitude that has almost never been reached, save for about a roughly month-long period in 2011, when it hit a record high of US$1,917.90.
In Canada, because of the favourable currency exchange rate, the price of gold stands at $2,407 per ounce — the highest on record.
Spot gold was up 0.6 per cent to US$1,808.75 per ounce on Monday.
The steady rise for gold, which began a year ago means that across Canada, gold projects that investors long shrugged off, met with nonchalance or ignored, such as Côté, are suddenly back in reach for chief executives, and the country could see a wave of new gold mines built in the coming months and years.
Even as other sectors struggle to absorb the economic shocks caused by the coronavirus pandemic, most gold mines in Canada have largely avoided any severe consequences, and managed to operate near full capacity through the pandemic, if not at full capacity with disruptions and work stoppages short-lived in most cases.
Indeed, Canada’s gold miners are set to begin posting what analysts expect will be stellar second-quarter results. Vancouver-based B2Gold Inc. kicked things off on Monday, reporting record revenue of US$442 million in the three months ended June 30, 65 per cent higher than the same period last year.
Meanwhile, Toronto-based Yamana Gold Inc., which had seen temporary suspensions at two mines earlier this year and revised its annual guidance in April, said its gold production is now tracking above expectations and it’s ramping up mines that were closed faster than expected.
Haywood Securities Inc. team of mining and metals analysts wrote last week that gold prices thrive during moments of uncertainty, and that’s been a boon for the sector.
In the first half of the year, investors poured a record US$39.5 billion into goldbacked exchange-traded funds, “ahead of the previous full-year record of US$23 billion reached in 2016,” according to Vancouver-based Haywood.
Josh Wolfson, director of global mining research at RBC Capital Markets, said that while gold started rising in early 2019, steadily climbing 38 per cent to US$1,800 from around US$1,300, the sector so far has remained disciplined in spending even as its profits grow.
“Companies have been focused on repaying debt, increasing dividends, rather than increasing capital spending and engaging in acquisitions,” said Wolfson.
Net debt among the top 25 producers is trending down compared to the upward trajectory seen during the last bull cycle for gold, according to Wolfson’s note.
The previous cycle started around 2002 when gold traded at around US$200 per ounce, and continued rising to historical peaks in 2011 to around US$1,900.
By 2012, prices were levelling off and declining, and the price of gold remained rangebound between US$1,000 and US$1,300 from roughly 2013 to 2018.
During that period, many companies discovered that their development projects were no longer economically feasible after gold prices declined, or that they had overpaid in acquisitions.
Now, companies are faced with a similar choice on how to invest and take advantage of current gold prices.
“The most important thing for these companies is to generate a return for the capital invested,” said Wolfson.
Already, there are signs that companies are looking differently at projects that were deemed too expensive just months ago.
At Iamgold, the price tag of the Côté project rose, to $1.25 billion to $1.32 billion, according to a note by Wolfson.
Philip Rabenok, senior analyst of investor relations, at Iamgold, said the company won’t make a final decision on whether to build Côté for another two months or so, but higher gold prices have made the project attractive.
“The project’s been around for awhile but there are certain things that have changed in terms of thinking,” said Rabenok. “Obviously, the environment to advance right now is favourable, and the project has been derisked significantly from where it was a few years back.”
While he said some investors had expressed concern about “a capex blowout” — that project costs would far exceed the estimate — Rabenok said management feels confident that won’t happen.
“I think overall the reception has been very positive, given where we are from a jurisdiction risk, from an operating-cost perspective, and from a capex perspective,” he said.
Meanwhile, other companies across Canada, with shovel-ready or close to shove-ready gold exploration projects are surging.
Vancouver-based Pure Gold Mining Inc. is around half finished constructing its Madsen gold mine in Red Lake, Ont., and projected to produce gold by year end.
Its stock has more than tripled in price. After trading at around 60 cents since 2016, it started surging in March and now trades at $2.19, with a market valuation of $840 million.
Nearby, Great Bear Resources Ltd. is also exploring for gold, and though it has yet to publish an initial resource estimate, the first of many steps toward proving a gold deposit exists and building a mine, the company’s stock has risen 32 per cent in the past year to $12.98 with a market capitalization of $650 million.
Michael Siperco, an analyst in Toronto at Velocity Capital, said that so far the rising price of gold and its effect on gold miners’ profits has been overshadowed by other factors, including debt repayments and the pandemic, which caused temporary slowdowns and uncertainty in first quarter results.
But Siperco noted that gold prices have continued to rise during that the past few months, and that the result will be obvious when miners announce their second-quarter earnings in a few weeks.
“At the end of the month, (gold-mining companies) are going to put up spectacular numbers, like historic numbers,” said Siperco, who added “There are a bunch of big, high-capital projects waiting to get built.”