Gold price nears two-month low on post-Trump win dollar boost
Gold has now declined more than 5% since last week’s election.
He is one of the best-known mining executives in Canada.
A Chartered Accountant with a Bachelor of Commerce from the University of Toronto, Garofalo began his career in 1990 as Treasurer of Inmet Mining. He joined Agnico-Eagle Mines in 1998, becoming the company’s CFO in 1999.
At that time, the company had only one gold mine — the pre-expansion LaRonde in Quebec’s Abitibi region. Garofalo helped Agnico nail down the financing that allowed the company to grow through mine expansions and asset purchases, without having to hedge production in an environment of rising gold prices.
In 2009, Agnico raised approximately one billion dollars, and Garofalo was named “Canada’s CFO of the Year,” an honor that’s usually handed out to CFOs from much larger and more established Canadian companies.
He joined Hudbay Minerals as the CEO in 2011 when the company was in turmoil, having gone through four chief executives in just two years. His quick turn-around of the company resulted in him being named “Mining Person of the Year” by the Northern Miner in 2012.
The Goldcorp opportunity fell out of the sky at just the right time
During his five years as Hudbay CEO, Garofalo turned the company into a highly regarded base-metal producer. His strategy: to introduce a plan for growth focused on projects in low-risk jurisdictions and to instill new financial discipline through long-life, low-cost mines that generate strong returns and lasting benefits.
His first action when he arrived at Hudbay in 2010 was to invest back in its core business: Manitoba. In doing so, Garofalo sent a signal about the importance of the company’s mining tradition in the province. Today’s Hudbay’s workforce is comprised of third generation miners.
In Manitoba, Garofalo determined there was a deposit big enough to start the construction phase rather than continuing to drill. As a result, the company fast tracked a plan to develop Lalor (almost $550 million) and then later they developed Reed.
After reinvesting in Hudbay’s historic core Manitoba business, the company then set its sights on diversifying outside of Canada and into open pit mining, acquiring the Constancia copper project in Peru (which is now Hudbay’s largest operation), building the US$1.7 billion mine one year later and reaching commercial production on April 2015. Constancia is now Hudbay’s fourth largest producing asset, along with the relatively new Lalor and Reed mines and the aging 777 zinc-copper mine in Manitoba.
The result: when Garofalo left Hudbay Minerals in December 2015 the company had experienced a budget decrease, increased production and lower operating costs that improved revenues and cash flow for the mining company.
He is joining Goldcorp as the new CEO during a time of economic turmoil in the mining sector.
No, it wasn’t planned. My objective was actually to stay at Hudbay for 10 years. I always had in the back of my mind that a good CEO should be able to entrench a new culture over a 10-year period. After that time, people at an organization get tired of hearing the same voice and also if the CEO doesn’t leave after 10 years it stifles internal mobility for a lot of people inside the organization. You start to lose some of your better team members because they want personal and professional development opportunities. But the Goldcorp opportunity fell out of the sky at just the right time. The good thing is that when I look at what we accomplished at Hudbay over 5 years, we did what we said we’d accomplished, which was to invest back in the core business, to make sure we could perpetuate that and then diversify the company not just into different countries but also to the open pit mining because we needed to develop that skill set. And then to introduce a growth pipeline into the company, too (we did that with the acquisition of the Rosemont copper project, in Arizona). I feel I was leaving at the right time, we’ve just completed the $2.3 billion construction of the three mines and all of them are now operating efficiently and successfully.
It’s a large international, senior company, the market leader in the gold sector internationally. To be able to lead an industry leader is a tremendous opportunity. It’s a much larger platform and it’s going to challenge me in ways I’ve never been challenged before. Hudbay is a great company and I’m sure if I’d stayed there we would have built something much bigger over the time. But Goldcorp offers me a chance to optimize what is actually an excellent business.
It’s not unlike Hudbay. Hudbay just finished a big construction phase and now is harvesting its return from those assets. Goldcorp has gone through that as well. Goldcorp just build two large mines for $4billion and now they are achieving a steady state production. My challenge now is to re-orient the organization, to harvest that business and to optimize the existing assets.
One way is to identify the opportunities where we can realize better returns from the existing operations whether is through internal expansion opportunities, exploration opportunities or by extending mine lives. We need to identify those opportunities, prioritize our expenditures and maximize the return on those assets. The other way is to streamline the organizational design because the organizational design that you need for construction is different than what you need for harvesting the business. When you’re building mines you need to tend lot of fires at once, and you require staff for that. But when you’re operating mines at a steady state and trying to maximize the return on those assets, it requires a different skill set, a different focus and a different reorientation. I think there are opportunities to streamline the business to make sure there are delivering optimum results.
There’ve been some start-up challenges there associated with more complexity in the geology than anticipated. That’s not uncommon, though, because when you’re defining a new deposit geologically you’re doing it through surface drilling initially. When you start to expose the ore, to get underground and actually start to mine, generally you have surprises — sometimes positive and sometimes negative. In this case, all the gold that was defined from surface drilling is in the ground, but it’s in a more complex setting than expected. Goldcorp is getting smarter in how to mine that deposit and the methods we’re using are getting better, getting more efficient as we get more familiar with the deposit. I expect the results to improve. The important thing is that the gold that we thought it was there is there; it’s still a very sound deposit. I’m very confident that it is going to be a cornerstone asset for Goldcorp for decades. The reason I like Éléonore is because it’s an entirely new mining camp. It’s up right on James Bay (Northern Quebec), and it’s where nobody else has mined before, so we have first mover advantage on that camp. We have a large industrial complex of 7,000 tonnes concentrator there. We have tied up a massive amount of geologically prospective unexplored land near it. Being first movers is a significant advantage and our challenge is to make sure we maintain dominance in the camp because I think it’ll be prolific for long afterwards.
Yes, there are. Mining is mining at the end of the day, whether the ore has gold or copper or zinc in it. At the end of the day, the mining and the metallurgical properties are quite similar. Hudbay mined a lot of gold as well; they mine over a hundred thousand ounces of gold a year so a lot of these deposits are polymetallic. The difference is more in the market’s perception as mining companies and gold companies generally have a higher multiple than the base metals companies. The reasons can be complex: gold is a currency where other metals are commodities. Because it’s a currency, the market seems to afford gold companies option value that they don’t afford base metal companies. Go gold companies typically tend to trade at significant premium to base metal companies, even though they’re mining similar rock and the process for extracting the metal are very similar. But because Goldcorp and gold companies generally perceive this, gold companies get a better multiple than the base metal companies do.
The fatality was very unfortunate. Our safety vision at Goldcorp is ‘Safe enough for our families,’ and our mission is zero fatalities. Last year we had one. The year before we had none. But one is one too many. We want people to go home exactly in the same condition they come into work in every day, and I believe that our safety practices are the second to none in the world. We also have one of the lowest accident injury frequency rates, so we have a very good safety records. In this specific case, there were a lot of circumstances behind this fatality that they have really nothing to do with our practises. It’s still subjected to investigation by the local authorities, but by all appearances somebody took a risk that they shouldn’t have taken. There’s no ounce of gold worth risking your life for.
We do reinforce it every day. In this specific circumstance, it was a practise undertaken by this individual worker and it was a significant lesson for the rest of the world: you can’t take this risk. One, because it contravened our own rules, and two, it contravened the law. Unfortunately this worker went into an open stope. Normally, you mine by remote control. You send a machine but you never send a person into that area. Unfortunately, for reasons we’ll never know, he went into an open area and broke all the rules, broke the law, paid with his life and left a family behind, which is really terrible. That gives us an opportunity to reinforce our work force that is against the rules, against the law and you shouldn’t be doing it because it cost this gentleman his life at the end of the day. They are very unusual circumstances. We can’t explain ourselves why he did what he did but hopefully everybody will learn that you just cannot take that risks in at the workplace. There’s no asset worth risking your life for.
I think Goldcorp has excellent standards in that regard. We have a sustainability excellence management system called SEMS that we apply to all of our worksites. Each of our worksites has to achieve SEMS standards within a defined period of achieving commercial production. It’s not dissimilar to what we did at Hudbay (OHSAS 18001 certification), but is a preparatory system which has many of the same elements that OHSAS 18001 has. However, SEMS also has standards related to sustainable development and community relations and the likes, so it’s much more holistic that OHSAS 18001.
Yes, it has. We have impact benefit agreements in place around all of our mines in Ontario. For example, at our Musselwhite mine and Porcupine mine in Timmins. We have signed impact benefit agreements with all the local Cree communities around Éléonore as well. We identify areas of influence around each of our mine sites and the affected indigenous communities. In each case, we sign impact benefit agreements to ensure that Indigenous peoples have access to employment and contract opportunities for outsourced work.
No, it’s not going to change. Our focus is going to continue to be on gold and on low political risk jurisdictions. I think the fundamental principles on which Goldcorp were built over the last decade are not going to change, but overtime we may have to expand our geographic footprint out of the Americas. Every year, we are mining almost the equivalent of Éléonore or two Red Lakes, so we’ve achieved a certain scale and it’s becoming more difficult to find deposits of that scale to maintain our reserve base so we are having to look at other jurisdictions. But what we won’t do is go away from gold. We’ll stay focused on gold, and we’ll still stay focused on local plural jurisdictions.
To be fair, many of the organizational changes I’m contemplating Chuck would have undertaken anyway. Chuck chose to retire, he has been at it a long time, and he decided that he wanted to not work full time anymore, and I respect that. I’m sure that if he stayed, he would have undertaken a lot of the changes that we’re contemplating for our organizational design. Where I think I add value is that I bring a lot of experience from three other mining companies and have an understanding of efficient organizational design for the phase that we’re currently in. It’s really about reorienting the company, changing the mindset to focus on generating the best return of our existing mines rather than on building. Our focus on the last few years has been on building and now it requires a different skill set, mine set. Now, it’s about positioning ourselves to optimize results from the business that Chuck successfully built.
I think that is a very harsh judgement. We’re talking about mines that take up to 10 years to build (that’s typically how long it takes to build new mines) and also these are mines that have 20, 30, 40, 50 years lives. So, how can you judge the quality of the investment over one, two or three quarters? You really have to look over a fullness of time, over a number of cycles. The good thing about these long life deposits, like Éléonore, Cerro Negro or Peñasquito that are already in operation, is that they are going to experience multiple cycles over their mine lives. It’s during the peaks of their cycles where you generate superior returns. I remember people asking me if I regretted building Constancia when I did because when we achieved commercial production copper prices were falling to $2/pound and my answer to that was, “ask me that in 20 years whether I regret building Constancia or not”.
There’s that risk. We thought we were going into a tightening cycle in benchmark US interest rates. The Federal Reserve was trying to raise interest rates in December, and since then the expectation has been that we’re going to see a tightening cycle of raising interest. Gold doesn’t tend to do very well in these periods, because people buy gold because they’re concerned about currencies valuation and paper currencies being undermined by easing of monitoring policy. But if interest rates start to go up, the opportunity cost of gold goes up, and so people sell their gold and buy treasury bonds so they get yield. But it looks like the Fed is starting to backtrack already. The macroeconomic indicators since December have not being as healthy as anticipated, and it’s quite possible they may actually reverse course by 180 degrees and start to cut interest rates again. If that continues, then gold goes up. Really what drives investment dollars in gold is the lack of yield in the bond market. Right now, even in the last two months, the environment has changed dramatically. I began 2016 being quite cautious about gold price. I’m more optimistic now given the direction of interest rates. The other factor is that weaker gold prices of between $1,000 to $1,100 in the last couple of years have squeezed reserves and production out of the system. So I expected mine supply is about to peak, and we’re into a period of significant decline over the next decade. We’re not building anything of scale in the gold industry right now. There are no big mines under construction and so when the decline starts it can’t reverse quickly because the average time required to build new mines is about a decade right now. So even if gold goes to $2,000 tomorrow and industry decides “okay, we’re going to start building mines as quickly as we can,” the reality is that there are no undeveloped gold mines ready to construct tomorrow. They need to be engineered, to be drilled, to be permitted you need to get a social licence, and that takes a lot of time.
15. What do you think is your biggest accomplishment?
From a personal perspective, it is raising three children. Two of them are now at university and doing very well. The third, who is very bright and athletic, and I’m sure she’ll do very well when she gets to university. Having a hand on their care and upbringing has been personally the most rewarding thing I’ve ever done in my life. Professionally, I would say it’s my whole body of work. I’ve been very fortunate to have worked with some very strong people in the industry who now are really legends. I learned a lot from them. I’ve been involved in the construction of 13 mines in every level, from a very junior level to the most senior level. In every case I believe we created value out of nothing, out of powder rocks, and you actually help build communities as well and create a very good standard of living for the people associated and living around the mines. That’s the really neat thing about mining, for that matter natural resources as well. The reality is that every developed economy in the world got that way by exploiting their primary resources first. You can’t have secondary and tertiary industries without that happening in primary industries.
