Gold mines emerge from survival mode
IT HAS been a dirty word in the gold-mining industry for the past three years, but now companies can’t stop saying it: growth.
Top executives are on the hunt for mergers and acquisitions, and focusing on exploration as the industry emerges from survival mode. Gold prices have recovered and cost cuts are taking effect, delivering profits for companies that need to remedy a shortage of new discoveries and declining reserves.
The trouble is that they have a bad history when it comes to deal-making. In the China-led commodity boom, the entire mining industry spent heavily on deals and big projects that soured when metals prices later collapsed. Companies wrote off close to $100 billion (R1.34 trillion) between 2011 and 2016, according to analysts at Investec.
Gold producers say this time will be different, but the losses generated by a decade of wasteful spending during the bull market to 2011 are still fresh in investors’ memories.
“All of us have got one issue and that’s that we haven’t done much exploration in the last 10 years, and all our assets’ lives are getting shorter,” Peter Steenkamp, chief executive of Harmony Gold Mining, said at the Mining Indaba conference in Cape Town. “Everybody is looking to replace the ounces that they’re mining.”
“Beyond the next three to five years, there’s a significant drop-off in the gold industry’s production profile,” said Arnold van Graan, an analyst at Johannesburg-based Nedbank Capital. “Most companies are struggling to fill the gap that’s emerging and that’s why you’re seeing a resurgence in exploration and M&A.”
For example, in the past year: l Acacia Mining said it was in early-stage talks with Endeavour Mining Corporation about a possible merger. l Gold Fields is spending A$350 million (R3.58bn) for projects in Australia. l Sibanye Gold agreed to pay $2.2bn for Stillwater Mining, a Montana-based platinum and palladium producer. l Harmony said it was looking to buy an in-production asset that will offset declining output in South Africa.
‘Not one of the big guys has a growth story, because no one has invested in the future.’
It’s a dramatic change in strategy from recent years, when the biggest priority was to survive the downturn in metal prices by cutting costs and paying down debt.
As a result, less money went into exploration and investment in existing operations. Gold mine supply will peak in 2019 and keep falling until at least 2025, according to BMO Capital Markets.
Due to fewer and smaller discoveries, reduced mine life and a lower gold price since 2013, the amount of economically viable gold in the world is declining. Major producers’ reserves have fallen 40 percent since 2011, according to Bloomberg Intelligence.
“Not one of the big guys has a growth story, because no one has invested in the future of this industry,” said Mark Bristow, chief executive of Randgold Resources.
AngloGold Ashanti , the world’s third-largest producer, said there was still room for the company to grow organically. It’s investing in brownfields projects, or areas near existing mines, in Tanzania, Brazil, Guinea and the Democratic Republic of Congo, rather than buying up other companies. – Bloomberg