Sticking ‘to their knitting’

Gold executives promise prudence as prices surge

Peter Marrone, chairman of Toronto-based Yamana Gold Inc., isn’t betting that a Bull Run is just around the corner even as gold prices soar to their highest point in a half-decade.

His cautious attitude about rising bullion prices is not unusual in a sector that is still suffering the hangover effects from the last time prices broke out. That was in the aftermath of the 2008 financial crisis, and gold mining companies used the added revenue for a shopping spree that left many with debt that has still not been fully paid down.

Now, after several weeks in which gold prices have hovered around US$1,400 per ounce — a threshold not crossed since 2013 — some gold bugs believe a United States-China trade war and continuing low interest rates will push prices even higher in the immediate future.

Yet many mining executives are adopting a chastened tone, swatting away chatter about potential mergers and focusing instead on cost-cutting and organic-growth initiatives.

“I am convinced that the market will reward companies that stick to their knitting,” Marrone said. “This time around, executives at mining companies learned from the last time around.”

Gold mining executives often say the missteps companies made the last time gold prices surged caused general investors to put their money into other sectors. They’re promising to lure them back with consistent profits, rather than a high-growth pitch, and their recent checkered performances helps explain why.

Like many of its peers, the past few years have been rough for Yamana. It underperformed the VanEck Vectors Gold Miners Exchange Traded Fund by 30 per cent in the past year and 65 per cent during the past five years.

Marrone said his company has cut tens of millions of dollars in annual expenses by streamlining its management structure. Management is also making a concerted effort to channel more money into buying Yamana stock in response to criticism that the company’s executive compensation is too high.

In April, the company announced a $1-billion sale of its Chapada mine in Brazil, which Marrone characterized as a way for the company to pay down its $1.6-billion debt.

Yamana’s merger history may compare favourably to some of its peers. In 2014, it and Agnico Eagle Mines Ltd. made a joint $4-billion acquisition of Osisko Mining Corp. in a deal that helped establish Yamana as a significant gold producer by giving it 50-per-cent ownership of the Canadian Malarctic mine in Quebec.

The deal ranked as one of only two among the gold sector’s eight largest transactions between 2010 and 2017 that did not result in any impairment for the purchaser, according to an analysis by hedge fund Paulson & Co. More than 80 per cent of the value of the impaired deals was ultimately written off.

Marrone said the company is not interested in mergers and will focus on increasing the production profile at its existing mines and developing new properties.

“It’s not sexy and exciting to talk about (an extra) 25,000 ounces coming from an existing operation,” he said, “but when it translates into cash flows and free cash flows, it’s only a matter of time before people see” the investment opportunity.

Leaving aside gold production increases, mining companies remain leveraged to the price of gold, meaning they are poised to generate more revenue as the price surpasses US$1,400 per ounce,

Andrew Kaip, a BMO Capital Markets analyst, said many investors remain wary of the sector given its recent performance, but he believes that is why many mining executives are likely to be cautious if gold prices keep rising in the coming months.

“We’re conceivably entering into an environment where investors are actually going to see the benefit of margin expansion, whereas, previously, margin expansion was squandered,” he said. “I see a much more conservative management than 10 years ago.”

Financial Post gfriedman@postmedia.com HAVE GOLD STOCKS PLATEAUED?