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Goldcorp

Gold has been on a tear in the wake of last week's shocking Brexit vote, but investors who want the best returns may want to look to producers rather than the metal itself.

By and large, miners flopped at creating value for shareholders during the last run-up in gold prices that began a more than decade ago. Investors who simply bought gold during those years did much better than those who bet on miners' shares: From 2004 through 2012, gold rose more than 300 per cent, compared to just 73 per cent for the S&P/TSX global gold index (in U.S. dollars).

But this time around the comparison is shaping up differently. As precious metal prices have surged this year, many gold miners' stocks have produced gains that are much larger than the rise in the underlying metal.

But David Garofalo, who took over as chief executive officer of Vancouver-based Goldcorp Inc. at the end of February, says the industry has learned its lesson when it comes to handling a rising gold price.

Goldcorp is not among the sector's biggest gainers, but even so its shares have soared more than 50 per cent in value since January, while the price of gold has advanced only about 25 per cent.

One reason for the outperformance is that the industry is no longer engaged in a mad scramble to expand output, said Mr. Garofalo, 50, who previously served as chief executive of HudBay Minerals Inc., a base-metals producer.

The downturn in gold prices after 2012 put a damper on many expansion projects. So did a persistent lack of exploration success across the industry.

As a result, gold miners are no longer eviscerating their profit margins by bidding against each other for scarce construction resources. Instead, they are working to amplify the metal's return by cutting costs.

"If gold mining's not a volume proposition, it has to be a margin proposition," Mr. Garofalo said in an interview at Goldcorp's Toronto office. "It has to be about building the value of the business by increasing profitability, as opposed to chasing volume for volume's sake."

In his first few months at Goldcorp, Mr. Garofalo has slashed production guidance for the next three years, cut the dividend and announced he is aiming to generate $250-million (U.S.) over the next two years in mine site and corporate efficiencies.

The industry's lack of exploration success reflects a "geological reality" in which large, easily accessed gold deposits are becoming rarer, he says.

"We can't chase ounces even if we wanted to. What we do has to be about growing the value of our business rather than growing volume."

To be sure, some of the industry's recent gains in efficiency are more about lucky breaks than managerial ingenuity.

Energy and fuel costs, for instance, have tumbled over the past couple of years in tandem with falling oil prices. Miners with operations outside the United States have received an additional boost from the strength of the U.S. dollar, which allows them to produce in cheap local currencies, then sell their metal in greenbacks.

Both those factors have probably played themselves out and may even go into reverse. But Mr. Garofalo, an accountant by training, said there is still plenty of scope to cut costs in other areas – notably labour expenses.

One prime target for his efficiency drive will be Goldcorp's Cerro Negro mine in Argentina. It employs about 2,300 people. By comparison, the company's similarly sized Musselwhite mine in Ontario operates with only about 650 employees. The difference between the two operations largely reflects Argentina's cumbersome labour laws.

Mr. Garofalo said the new government of Mauricio Macri, elected last November, has signalled that it is sympathetic to Goldcorp's need for higher productivity.

"Things have changed at breathtaking speed in a very short time under Macri," Mr. Garofalo noted. "He understands that labour productivity is one of his biggest challenge in advancing Argentina's economy and he understands our need to right size our work force to match the scale of the operation we have."

Goldcorp and other gold miners have to focus on efficiency because of dwindling production, he said.

"As an industry, we're mining over 90 million ounces of gold per annum, and I can count the number of shovel-ready five and 10 million ounce deposits on one hand and have fingers left over," Mr. Garofalo said.

"We're clearly not replacing what we're mining and as a result we're in a downward trajectory for production as an industry."

Every producer has to think about how to maintain its output, but Mr. Garofalo sees little upside in buying operating mines, which he said are usually fully valued by the market.

Instead, he is focusing on smaller, earlier stage projects, such as the $520-million (Canadian), all-share deal he did in May to acquire Kaminak Gold Corp., owner of a deposit in the Yukon.

Goldcorp is also making small "toehold" private placements in a number of junior companies. "That's where you can help to create value," Mr. Garofalo said.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 18/03/24 2:44pm EDT.

SymbolName% changeLast
G-N
Genpact Ltd
+0.42%33.26
G-T
Augusta Gold Corp
-1.12%0.88

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