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January 14, 2014 5:57 pm

Gold mining: Squandered opportunity
By James Wilson

Investor demands for restructuring and an end to the old approach of sprawling expansion are growing

I

n the vast open pit at Goldstrike, electric shovels 20 metres tall crunch easily through the rock of northern evada! "hree scoops fill a truck that hauls off #00 tonnes of gold$%earing ore, while underground teams near%y %ore richer deposits at 2& metres a day!

"he site, excavated over almost three decades, set 'arrick Gold on its way to %ecoming the world(s largest gold miner! )et more than *,000km to the south, at a mine the company hopes will one day %e as successful, things are very different! +ascua ,ama, &,000 metres up in the -ndes straddling .hile and -rgentina, has %een %lighted %y cost overruns and environmental disputes! 'arrick has written off more than /&%n on the incomplete pro0ect: engineers are now putting it into what might %e a long hi%ernation until the gold price 1 and the .anadian company(s %alance sheet 1 recover!
Faded glitter

"he tale of two mines epitomises the profound change in fortunes for the gold mining industry! 'arrick and its peers once en0oyed premium valuations as eager investors anticipated outsi2ed returns from a clim%ing gold price! +rofits flowed easily from the likes of Goldstrike(s 2m ounces of annual production in pro$mining and accessi%le 0urisdictions such as evada! ow, mishandled investments and %loated pro0ects have taken the shine off gold miners, which in recent years have generally underperformed the metal itself! +eter 3unk, the .anadian entrepreneur who %uilt 'arrick, steps down as chairman this year with a shadow cast over the end of his career %y his company(s pro%lems!

Gold price and gold producers

4eutsche 'ank says the four largest orth -merican gold companies 1 'arrick, ewmont, Goldcorp and 5inross 1 are worth less than in 2006, when gold was half today(s price of around /7,28& per o2! "he value of -ngloGold -shanti, the South -frican miner that is the world(s third$largest producer %y output, has fallen %y more than 80 per cent over the same period! 9urther disappointments await! Some of the world(s largest gold miners are expected soon to announce cuts to the reserves they calculate are in the ground, acknowledging that millions of ounces of ore are no longer economic to mine as the gold price has tum%led! 9or some investors, this is more than 0ust an inevita%le turn of the commodity price wheel of fortune in a cyclical industry! "hey hope 2078 will %ring a fundamental rethink of the :%ig gold; model that created sprawling companies such as 'arrick and ewmont 1 each producing more than &m o2 of gold annually 1 while doing little to satisfy shareholders! :<e need to see a cleansing of the sector that allows companies to (fess up to the mistakes they have made and reset the dial,; says =vy >am%ro, co$manager of the 'lack?ock <orld 3ining "rust! :3any gold companies have %een growing for the sake of growth, often financed with share issues 1 and that has ultimately watered down returns for investors! .ompanies have %een going %ackwards rather than forwards from an investor point of view!; Some miners are still gunning for growth! "his week Goldcorp, which has come to rival 'arrick as the world(s most valua%le gold miner, unveiled a hostile ./2!6%n %id for @sisko, a .anadian rival! 9or others, the need for change has %een more urgent! 'arrick raised /#%n in equity in ovem%er to shore up its finances %y paying off part of its load of de%t! 3any analysts expect other gold miners to try to come %ack to markets for more cash 1 a tall order if investors have lost trust! 3oreover, this is the first crisis to envelop miners since most a%andoned hedging, and following the creation of exchange traded funds in gold 1 simple instruments that have given many investors the exposure they want to the metal without the complications and risks of holding companies( shares! .ompanies could face even frostier times ahead unless they can restore faith that, through growth or dividends, they can provide returns that are %etter than can %e o%tained from simply holding gold! eil Gregson, a fund manager at A+3organ -sset 3anagement, says miners %ecame la2y in the way they ran their %usinesses as the price of gold rose 600 per cent in the first 77 years of the century! :"hey thought that the gold price would always save them,; he says! :"hey lost touch with their operations!;

"ttp://###.ft.com/cm$/$/2/!%6&ecf!-'6c(-11e3-a2(3- 1!!fea)dc ."tml*$egid+ 1 ...

1/16/2 1!

is expensive and can stretch management capacity.ouncil.ama! 'ut larger mines require more cost and time %etween discovery and production! 4eutsche(s 3r 'eristain %elieves %igger miners. a data provider. %uying . gold miners glossed over spending on starting pro0ects or keeping mines running smoothly! 3any miners %elonging to the <orld Gold . eye$catching pro0ects. which is one reason why the superma0or model does not work for the gold industry!.. miners can plough ahead with %ig.. 1 the desire of governments to get a greater share of revenues from mining! 9or example. a second in 'ra2il and a third in west -frica!... some C00m o2 was added to glo%al gold reserves and resources in the decade and a half up to 2072 1 %ut 7!2%n o2 was mined during that period! or has the quality of reserves %een maintained! 3ark 'ristow.. an industry group. . says the premium valuation that gold miners once attracted will not return.small hedge fund. chief executive of ?andgold ?esources. the race to expand drove up costs. have now started pu%lishing their :all$in sustaining costs. -ustralia(s largest gold miner.ihir of +apua ew Guinea for /*!&%n. a key pro0ect for %oth companies! "his month Goldcorp said its effective tax rate had increased from 2* per cent a year ago to 87 per cent as a result of the +ue%lo Bie0o deal as well as a tax rise in 3exico! . last year called for 'arrick to un%undle more regional %usiness units! . while economies of scale are limited! 3r >am%ro says: :"here are no real synergies in %eing %igger if you have one deposit in -ustralia.. such as 'arrick(s +ascua . he says! "ttp://###. with access to cheap capital. in 2077 and ewmont is seeking deeper exposure to copper! Gary Gold%erg. <ith few %ig new deposits in easily minea%le areas. un%undled some South -frican operations into a company called Si%anye Gold in 2072! 'arrick has also hived off a su%sidiary called -frican 'arrick Gold. of production 1 revealing little scope for returns to investors at current prices! . "wo 9ish 3anagement.com Page 2 of 3 Some pro%lems of the gold sector afflicted the whole mining industry over a decade when prices for most commodities rose strongly! -s companies scram%led to take advantage %y increasing output.FT. says Aoe 9oster. or ewcrest. 'arrick and Goldcorp had to %ow last year to demands in the 4ominican ?epu%lic for a renegotiated agreement over their +ue%lo Bie0o mine. for the likes of 'arrick and ewmont! :"hey know that they can(t grow in gold so they are looking at non$gold alternatives! 'ut as a gold investor I won(t %e interested! Gold is a unique asset class and people %uy gold companies for their gold exposure."tml*$egid+ 1 . particularly for salaries of experienced staff and for equipment! It also prompted companies to accelerate more marginal pro0ects.ft.. . -lternatively. often in riskier locations. the %igger miners have had to compensate! @ne o%vious way has %een %y acquisition 1 such as 5inross %uying ?ed 'ack 3ining for /E!7%n. meaning mining will %e costlier! 3r 9oster at Ban =ck says: :"here is a natural limit to the si2e of a gold company! )ou 0ust don(t find many mega deposits in mother nature. says the grade of reserves has gone from 2!6g per tonne in 2000 to a%out 7!7gDtonne.ompanies( overly rosy assessments of their costs of production have unwittingly raised expectations for governments 1 and investors! 'y focusing on day$to$day operating costs. a portfolio manager at Ban =ck International Investors Gold 9und! In all mines. confident that the price would offer support! :. rising prices induce miners to exploit more marginal areas of lower ore grades! 4igging more dirt with each ounce of metal inevita%ly adds to operating costs! "hese pro%lems are compounded in gold mining! "he precious metal is not a%undant and deposits are usually smaller and more quickly exhausted than %ase metals! -s gold miners have grown.Gold mining: Squandered opportunity .ompanies are cutting costs! 'ut other changes require more fundamental attention! @ne solution advocated %y investors is that companies %reak themselves up! Smaller units might %e nim%ler and cheaper to run 1 nota%ly the salary %ill for top executives 1 and more :under the radar. while increasing the likelihood of falling victim to :resource nationalism.osts went up far more quickly than anyone realised! o one had their head around the cost inflation until it was too late. 1/16/2 1! . rather than finding them through exploration. although its attempts to sell the F5$listed unit have foundered! .com/cm$/$/2/!%6&ecf!-'6c(-11e3-a2(3. "he pro%lem is that investors are cool on the idea! 3r 9oster calls it :another syndrome of %eing a superma0or. a copper producer... so there should %e no penalty for diversifying! -nother mining chief executive says: :If investors gave us credit for it we(d all like to %e mining other metals %ecause it makes sense not to have all eggs in the same %asket! @ur core competencies are digging and infrastructure and logistics and so it doesn(t matter so much what exactly we are digging!. they have had to run ever faster and harder to replace the ore they have dug out of the ground each year 1 with limited success! -ccording to S . %oth in 2070! )et %uying reserves. have %een taking too many risks with large$scale pro0ects. one of -frica(s largest producers. ewmont(s chief executive.second idea is that gold miners should diversify! 'arrick %ought =quinox.1!!fea)dc . for governments and G@s opposed to mining development! "he /72m share package given to Aohn "hornton on %ecoming co$chairman at 'arrick in 2072 was a lightning rod for investor discontent! Gold 9ields.

i"ratio !report!o !hold!after!lac*!of!e4ide ce &ra ... says 3r 'eristain! :I am still not sure all companies have grasped this 1 or whether those that have are really %elieving it wholeheartedly!. $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ Juniors: Fewer lines in the water slash hopes of a big catch <aiting to meet investors at a gold industry conference.&!head!+a"arde!war s!of!"rowi "!threat!of!deflatio P$erto!6ico!a!step!closer!to!defa$lt '$r*e#!m$st!defe d!its!democrac#!a"ai st!the!7$le ists 3ome!of!%hi ese!"e eral!raided!as!officials!step!$p!"raft!probe 8-!$ li*el#!to!bi !its!ba !o !cr$de!e1ports 'he!o l#!wa#!is!$p!for!commodities 9orld!0a *!war s!of!capital!flow!ris*!to!emer"i "!mar*ets Printed from: http://www. rather than outright disgust!.artoma2s!dr$"!* owled"e 3ar"rea4es!+a sdow !re4eals!clie t!char"es!to!meet!r$le!cha "e 5.anadian explorer that did manage to raise money in 207#! :It(s not much fun at the moment!. a rising gold price will offer salvation! :"he silver lining is that companies will have much cleaner %alance sheets going forward! ow they need to change their model. a traditional venue for equity fundraising for mining.oto!=!smartpho e!i !8>?!&ra ce!a d!7erma # @!8>!web!pio eer!crac*s!the!8- "ttp://###.ois!3olla de!promises!ta1!c$ts!for!&re ch!b$si ess 9ells!&ar"o!calls!0itcoi !2r$les2!s$mmit Prod$cti4it#!crisis!ha$ ts!"lobal!eco om# 7old!mi i ":!-<$a dered!opport$ it# &aili "!elites!threate !o$r!f$t$re :co omists:!there!is! o!s$ch!thi "!as!the!2eco omic!approach2 7oo"le!to!la$ ch!its!.1!!fea)dc .html Pri t!a!si "le!cop#!of!this!article!for!perso al!$se. once again. evada. .anadian mining listings halved last year compared with 2072 while the amount of mining equity raised on the "SG Benture exchange was down &8 per cent! 3ore than half of .com Page 3 of 3 Some stronger miners still see opportunities to grow! =ven without any deal for @sisko.. a .anada(s 7.anada. © THE FINANCIAL TIMES LTD 2014!&'!a d!(&i a cial!'imes)!are!trademar*s!of!'he!&i a cial!'imes!+td. the num%er of new . one of the world(s largest producers! "he last company in which 3r <agner was involved was sold for /820m to a %igger miner. 1/16/2 1! ..ft. will %e favoured over those in more exotic locations! :<hen times are good people are non$selective! <hen times are %ad they need comfort food. says 3r <agner! >e suggests that companies such as his. reduce their si2e and improve their management and %oards. so we need 0uniors. In "oronto.FT. 4arin <agner has a succinct summary of the plight of many of the hundreds of 0unior gold miners 1 the exploration companies driven %y hopes of striking it rich %ut whose chances of %eing funded have shrunk with the gold price! :"here(s a lot of turkeys that aren(t going to fly.. weaker miners are limited to trying to pare %ack costs.com/cm$/$/2/!%6&ecf!-'6c(-11e3-a2(3. expects output to %e more than 80 per cent higher in 207E! @ther. says +aul ?ollinson.Gold mining: Squandered opportunity ..ost!Pop$lar!o !-ocial!. exploring in .! :$rope!i !sec$rities!mar*ets!sha*e-$p .etwor*s /e$tsche!0a *!s$spe ds!traders!amid!"lobal!fore1!probe 'rial!hears!doctor!2flabber"asted2!b#!. chief executive of 5inross Gold..com/cms/s/2/4869ecf4-76c5-11e3-a253-00144feabdc0. sell non$core assets and slow spending on new pro0ects 1 a strategy that smacks to some of hoping that. he says! :"hey come %ack to what they know 1 .anada.huck Aeannes.600 listed mining companies are in gold! 9or %ig gold producers. chief executive of 'almoral ?esources.!%o tact!$s!if!#o$!wish!to!pri t!more!to!distrib$te!to!others. the more chance you have of catching a fish ! ! ! no ma0or gold miner can replace everything through exploration and you have to %uy some production in. a classic example of how the 0unior sector should work! :If you have had some success people will give you the Hwhat if( money. a healthy 0unior sector raises the chances of gaining access to a significant pro0ect! :"he more lines you have in the water. where the company claimed it had discovered the world(s %iggest gold deposit in Indonesia! It was later found that the samples had %een falsified! :+ost 're$G was worse %ut this is a close second. RELATED TOPICS Gold .. says 3r <agner. 3r <agner says! :Gold explorers and producers are getting viewed with suspicion. 'ut the poor outlook for gold prices has %rought many explorers to the point where they invoke comparisons with sentiment in the late 7**0s following the 're$G scandal.ft. Goldcorp(s chief executive."tml*$egid+ 1 . 3exico!.