The tie-up between Barrick Gold Corp. and Randgold Resources Ltd. may mark the start of a wave of needed consolidation in the gold industry, says the head of Canada’s third-largest gold mining company.
The sector is struggling with a mismatch between the large number of companies vying for growth and the industry’s narrow pipeline of attractive mine developments, says Sean Boyd, chief executive officer of Agnico Eagle Mines Ltd.
“The industry needs M&A,” Mr. Boyd said in an interview at the company’s Toronto headquarters. “There’s just too few high-quality opportunities left and far too many players.”
The shortage of enviable assets is because many gold companies underinvested during what Mr. Boyd terms the “dark period” from 2012 to 2015, reducing headcounts and cutting back on exploration. After the price of gold went into freefall in late 2011, many industry players were forced to take large writedowns on expensive acquisitions and M&A largely ground to a halt.
But last month, Toronto-based Barrick Gold announced it was buying African operator Randgold for US$6-billion, the biggest acquisition in the gold sector in seven years. By buying Randgold, Barrick, which had been perilously close to losing its title as the world’s biggest gold producer, will remain on top for the foreseeable future.
Comparisons have been drawn between Mr. Boyd, Agnico’s long-standing CEO, and Randgold’s founder, Mark Bristow, who is set to become Barrick’s next CEO. Both are considered to be among the best operators in the industry, and both stocks have historically traded at a premium valuation compared with their peers.
But in contrast to the no-premium structure of the Barrick-Randgold deal, Mr. Boyd says he would never agree to such a deal, no matter who the potential acquirer might be.
“Absolutely not,” Mr. Boyd said of the idea of anyone buying the Toronto-based gold company at its market price. “We don’t have to. We wouldn’t.”
While Mr. Boyd is opposed to a zero-premium acquisition of Agnico, he said he would consider a takeover by the likes of U.S.-based Newmont Mining Corp., but only if it was willing to pay an “extremely high,” premium. Mr. Boyd admires the Colorado-based gold major, calling it a “fine company” with a “high-quality management team." Agnico has only been approached once in its 61-year history, after founder Paul Penna died in 1996. Mr. Boyd declined to identify who bid at the time, but said it was “bad form” that bankers were pitching deals the week after Mr. Penna’s passing.
Known for its measured approach to M&A, Agnico has made half a dozen acquisitions since 2005, buying assets in Mexico, Finland and Nunavut. Its biggest deal by far was in 2014 when the company paid roughly $1.9-billion for its 50-per-cent stake in Canadian Malartic, Canada’s biggest gold mine, from Osisko Mining Corp. (Yamana Gold Inc. bought the other 50 per cent).
An accountant by training, Mr. Boyd’s ethos is very much about mitigating risk. Unlike most of his competitors, Agnico builds its own mines, as opposed to outsourcing to an external engineering firm. Agnico is also extremely careful about venturing into foreign jurisdictions. In Mexico, where the company has two mines, Agnico hires locals, unlike many of its Canadian competitors, which tend to hire expats abroad. Apart from encountering some crime, Agnico has never had a serious problem in Mexico.
Barrick Gold, by contrast, has experienced multiple problems in Africa with its subsidiary Acacia Mining PLC subject to an export ban on gold concentrate for about a year and a half, after a major tax dispute escalated with the government. Agnico doesn’t operate in Africa and has no desire to enter the continent.
“We perceive a heightened level of risk that we’re not equipped to manage," Mr. Boyd said. "So we don’t go there.”
Agnico’s shares have fallen 18 per cent this year, partly because of weakness in the gold price, but also because of its cash flow coming under pressure from the construction of two new mines. Over the past few years, Agnico has spent roughly US$1.2-billion building Meliadine and Amaruq, both in Nunavut. The mines are on track to start commercial production next year, and will eventually add about 750,000 ounces of yearly gold production.
“Agnico is well positioned in a gold sector where replacing reserves has become more difficult,” wrote JPMorgan Chase & Co. analyst John Bridges in a report to clients earlier this month.
“We like the lower risk locations and long life of Agnico’s assets.”