Agnico Eagle CEO wary of ‘bigger is better’

Merger mania carries risk, Boyd insists

TORON TO • Sean Boyd, chief executive of Agnico Eagle Mines Ltd., wants to make it very clear: His company wants nothing to do with the merger mania suddenly sweeping the gold mining sector.

“The recent M&A is just competitive positioning among the biggest players in this business — not wanting to be left behind,” Boyd told the Prospectors & Developers Association of Canada conference in downtown Toronto on Sunday. The annual event, which attracts tens of thousands of mining investors and executives, runs through Wednesday and has historically provided an opportunity for dealmaking, and for reflection on industry trends.

This year, consolidation in the gold mining space has been a dominant topic of conversation as the two largest gold mining companies in the world square off: Barrick Gold Corp. last week made a hostile, US$17.8 billion bid for its rival Colorado-based Newmont Mining Corp., a deal that could create a company of unparalleled size, capable of producing 12 million ounces of gold per year.

That proposal follows close on the heels of Barrick’s own US$6 billion merger with Randgold Resources Ltd. late last year; and it threatens to derail Newmont’s $10 billion bid for Goldcorp Inc., made in January.

If Newmont shareholders ultimately support Barrick’s bid, which could take months to play out, many executives believe it could embolden other executives to make no-premium or even discounted bids for other companies, potentially unlocking an even greater wave of consolidation in the gold mining space.

In an interview, Boyd spoke at length about the Barrick bid, calling it “abnormal,” and suggested that after several years of cost cutting and a sober focus on risk mitigation, the industry may be moving toward another phase of mergers driven by a “bigger is better” mentality.

“I kind of don’t understand it,” Boyd said about Barrick’s bid. “Because I know how tough this business is — it flies in the face of what the industry has been doing these past few years, trying to squeeze risks out.

“In our view, this heightens risk because how do you keep it growing? How do you replace 12 million ounces (of gold) a year? You have to keep buying things.”

But Boyd acknowledged he’s not a disinterested party: His own company, the fourth-largest gold producer by market capitalization, could eventually find itself targeted for a merger if a nopremium deal becomes the standard.

His response is to not worry about it, and focus on providing strong shareholder returns. Although Agnico is open to opportunities, it continues to focus on investing in juniors, growing organically through exploration and building its own mines.

He is not entirely alone in questioning the sudden pace of mergers.

In an interview in February, Sandeep Biswas, chief executive of Australia’s Newcrest Mining Ltd — third-largest gold producer by market capitalization — also said he was not interested in mergers. Although sources say his company engaged in merger discussions with Goldcorp., Biswas emphasized organic growth as the best path toward creating value.

“There is this philosophy that you’ve got to get bigger, that there’s going to be a lot of consolidation, but I’m not exactly sure why,” he said. “It’s very hard to replenish ounces.”

Boyd did allow that being larger would allow some benefits, including creating more liquidity for investors, who he said are most concerned about risk these days. There may be some overhead cost savings through combinations, he said.

The lack of new gold discoveries and explorations is also driving many gold companies to seek growth through mergers, he said.

But creating larger companies carries its own risks.

“This ‘bigger is better’, it’s been tried before,” he said. “If you’ve got 30 or 40 mines spread out across the world, I don’t know how the heck you manage that.”

In looking at what motivated Barrick to bid for Newmont, eight weeks after its closed a deal to purchase Randgold, he noted its executive chairman John Thornton is a former investment banker whose forte is making deals.

Through Randgold, he brought Mark Bristow, a geologist who helped build and operate mines throughout Africa, into the chief executive role at Barrick.

But Boyd questioned whether Bristow would have trouble managing all of Barrick, which he called “a much more complex animal than Randgold,” with mines located all around the world, some of which he suggested are more technically difficult from an engineering standpoint, than Randgold’s mines.

“The new Barrick is a much more complex animal than Randgold,” said Boyd. “Randgold was complex from the point of view of its location (in Africa). From an engineering and technical standpoint, the assets were relatively straightforward.”

The fight between Barrick and Newmont is about “supremacy,” he said. If Barrick wins, it will form the largest gold miner in the world by a distance, capable of swallowing up many more companies.

If Newmont shakes off the hostile bid, and completes its deal with Goldcorp., it will be larger than Barrick.

“People say shouldn’t you be worried these other companies are going to ultimately see you as something they’d like to own,” said Boyd. “We’ve run this business for 60 years without looking over our shoulder. We can’t worry about what other people are going to do.”

Sean Boyd