Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Gold is the favoured commodity of 2013 with more than 80% of gold executives expecting to see a rise in the price of gold, which will drive increased spending on exploration and merger and acquisitions says the latest PricewaterhouseCoopers (PwC) Gold Price Report released Thursday.
After analyzing the 46 largest Toronto-listed gold mining companies, the firm found that more than 20 of these miners have cash reserves greater than $500 million.
“Gold miners are adamant about proving to the market that they’re once again a good investment – not just for the interim, but for the long-term,” says John Gravelle, Mining Leader for Canada and the Americas, PwC.
“Receiving investors’ approval will involve establishing cost effective management strategies, increasing dividend payments and responsibly investing in production growth – all on the back of a strong gold price.”
Gravelle says there’s been a shift in focus with gold executives concentrating on the bottom line, particularly on the rate of return of per ounce produced.
According to the report, the long-term price of gold used by gold miners has increased 6% from last year and 29% from two years ago to $1,400 per ounce.
Seniors vs. juniors/mid-tiers
When it comes to development and exploration spending, PwC found that 100% of senior gold companies used cash for such activities and they plan to continue to do so next year. Meanwhile, 89% of mid-tier gold companies will use cash for project development and 83% will use cash to fund exploration activity in 2013.
“Larger mining companies may be more watchful with their spending, but they haven’t forgotten about their exploration budgets. Expect increased exploration spending next year by senior and mid-tier miners, and well-funded juniors,” says Gravelle.
Gravelle adds, “While senior gold producers will use their cash to fund recently increased dividend commitments, they will carefully invest in projects that will produce superior rates of return.”
Some senior gold miners may also use their cash for strategic M&A activity. About 20% of senior gold companies plan to spend their money on acquisition related activities in 2013, while 33% of junior/mid-tier companies expect to spend their cash on acquisitions – this is double the number of companies that spent money on M&A activity in 2012 (14%).
“The equity market for junior gold companies appears to have finally reached the point where there is more upside than downside. Junior gold miners should therefore anticipate increased M&As,” says Gravelle.
China’s gold rush
While Canada tops the list with the most active gold buys in 2012 with 243 transactions worth $4.8 billion, China continues to keep an eye out for gold mines to acquire. In 2011 Chinese buyers acquired four of the top gold deals. This year, they were again responsible for four out of the top 10 gold deals announced.
“Chinese state owned entities remain interested in expanding their gold mining assets outside of China to secure steady access to gold in the future,” says Gravelle.
In the last few years, China has heavily invested in the African mining industry. “There are a number of examples of controlling investments by Chinese and Indian companies into gold, coal, and other commodity projects in Africa. Chinese investors come with significant financial support, facilitating the development of capital intensive mines,” concludes Gravelle.
The full report can be downloaded here.
