The current bull market has seen bullion hit a new all-time high of more than US$2,000 an ounce.Mathieu Dupuis/Handout
Sean Boyd, the chief executive of Agnico Eagle Mines Ltd., Canada’s second biggest gold company, says the industry has to stay disciplined as it benefits from swelling cash flows generated by near-record high bullion prices.
During the last great bull run in the precious metal, which ran from the early 2000s until 2012, many companies took big swings on expensive acquisitions that turned out to be disastrous. The current bull market, which kicked off about two years ago, has seen bullion hit a new all-time high of more than US$2,000 an ounce, but miners have been much more careful, eschewing flashy deals in favour of dividend increases.
The list of companies to either bump or reinstate their payouts recently includes Kinross Gold Corp., Yamana Gold Inc., Alamos Gold Inc., Newmont Corp. and Agnico, which released its third-quarter earnings Wednesday and announced it is increasing its dividend by 75 per cent to 35 US cents a share.
“Every investor meeting we get, one of the top questions is about capital allocation,” Mr. Boyd said in an interview. “The industry has to demonstrate that in this cycle, versus 12 years ago, that it’s going to remain disciplined.”
Bill Harris, portfolio manager with Toronto-based Avenue Investment Management, said it’s clear from the share-price gains of gold stocks that have increased their dividends that the market is telling management teams that growth isn’t the priority any more. It’s much more important to have a strong income stream.
Mr. Harris has bumped up his portfolio allocation to gold stocks to about 11 per cent from 5 per cent a few years ago, and he says it may go as high as 15 per cent during the current gold price cycle.
“This is the first time, and I’ve been following these companies for about 25 years, that they’re actually throwing off huge amounts of money," he said. “Three years ago, nobody even wanted to touch these things."
Known as one of the most prudent allocators of cash in the gold industry, Agnico’s Mr. Boyd said the company’s capital will be divided among giving money back to shareholders through dividends, keeping enough on its balance sheet to maintain an adequate cushion and devoting a sizable chunk to exploring for new gold.
But while growth may no longer be the priority for gold companies, just standing still is difficult. The mining industry faces the constant conundrum of trying to find new reserves to offset depletion every year. The hourglass is particularly unmerciful at gold companies, where deposits can run out in as little as 10 years, compared with 50-plus years for a copper mine.
Malartic in the Abitibi region of Quebec is Agnico’s biggest mine and, at its current rate, it is due to run out in about seven years. But Mr. Boyd has high hopes Malartic’s lifespan can be extended by as much as 15 years if the company can develop an underground mine to complement the existing open pit. Early drill results have been encouraging, and a preliminary study is expected early next year that will shed light on the economics of an underground expansion, but there are no guarantees.
“It’s early," Mr. Boyd said. "We still have a lot of work to do.”
The more immediate threat to Agnico’s business is the COVID-19 pandemic. To date, 123 Agnico employees have tested positive for the virus, the vast majority detected through testing and screening ahead of entering mine sites.
However, the company has struggled with the reliability of testing in Mexico, where it has two mines, and where a large quantity of its positive tests have been. To limit the chances of more infections, Agnico is testing workers a day or two before they are due to start their shifts, and transporting employees to sites privately, rather than letting them ride public transit.
Agnico shares gained 3.5 per cent on the Toronto Stock Exchange on Thursday to close at $104.79 apiece.
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Niall McGee