As gold hits all-time high, Canadian miners step back from its glare

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Chastened by past missteps, the Canadian gold industry is swapping recklessness for conservatism, and eschewing expensive deal making in favour of dividends, as the price of bullion hits new all-time highs.

On Monday, gold futures traded north of US$1,940 an ounce for the first time, surpassing the previous record of US$1,920 set back in September, 2011. The most-traded August futures settled at US$1,931 an ounce.

The ultimate safe haven investment, gold over the past few months has benefited from unparalleled volatility in financial markets, as the coronavirus has spread around the world and governments attempt to stave off a global depression by injecting trillions in economic stimulus. Historically low interest rates, a weakening U.S. dollar and renewed tensions between the United States and China have also benefited bullion.

During the previous great bull market in gold that lasted from the early 2000s through to late 2011, the industry made lots of mistakes. Marginal projects were put into production and senior miners such as Barrick Gold Corp., Goldcorp Inc. (now part of Newmont Corp.) and Kinross Gold Corp. cumulatively spent tens of billions of dollars on mergers and acquisitions that didn’t work out.

“As an industry we destroyed value through the last cycle and I don’t think boards or management groups want to repeat that,” said Richard Young, chief executive of Toronto-based Teranga Gold Corp.

“I think you’ll see much more caution in terms of M&A.”

In fact, since the beginning of the current bull market in gold in late 2018, the industry has by and large behaved itself. Companies have been much more disciplined in M&A, with low or sometimes no premium stock deals being the norm, as opposed to the 30 per cent or 40 per cent cash premiums of the past. Companies have also been disciplined during live M&A deals, refusing to raise bids, even when some shareholders have demanded them, such as Kirkland Lake Gold Ltd. refusing to offer a last minute sweetener when it bought Detour Gold Corp. earlier this year.

Mr. Young, who’s been in the industry for more than a quarter of a century, said that companies are walking way from a lot more deals than they did during the previous cycle, and are spending a lot longer conducting diligence before pouncing. For example, Teranga and Barrick spent a year in talks before a deal was hammered out between the two late last year that saw Teranga pay US$380-million for Barrick’s Massawa gold project in Senegal.

“I hope it continues and I think it will,” said gold portfolio manager Joe Foster, of the industry’s newfound discipline and conservatism.

“There’s been a big shift in strategy and thinking across gold companies. I don’t think you’ll see the reckless deals that we saw in past cycles,” added Mr. Foster, who manages the VanEck International Investors Gold Fund, which has US$1.1-billion under management.

With M&A not expected to be a major driver of corporate strategy over the next few years for the gold majors, gold companies are increasingly expected to give more of their cash back to shareholders. Yamana Gold Inc. last week bumped up its dividend by 12 per cent to 7 cents a share, its fourth increase in the payout in the past year.

Companies are also expected to look internally for growth, as opposed to externally. With a materially higher gold price in place, projects that previously appeared out of reach owing to their high cost structure may now suddenly be feasible.

“A lot of companies have projects on the shelf that need higher gold prices to be economic, so we’re starting to see those shelved projects being brought back into the production pipeline,” Mr. Foster said.

Last week, Toronto-based Iamgold Corp. announced it was going ahead with its $2.3-billion Côté gold project in Northern Ontario. In its latest investment return calculation, the company assumed a gold price of US$1,350 an ounce, up US$100 from an assumption in 2018 when gold was trading materially lower. (Iamgold owns 70 per cent of Côté with Japan’s Sumitomo Metal Mining Co. Ltd. owning the rest.)

But despite the rapid-fire rise in gold prices, not all companies are raising their price assumptions for calculating investment returns on projects. Teranga, which recently completed a prefeasibility study on the Massawa project, is keeping its price assumption on gold at the relatively conservative level of US$1,250 an ounce.

Mr. Foster says that what may emerge over time is a “bifurcation” in the industry, with one group of companies taking a cautious approach to the long-term gold price, and only putting low-cost, high-margin mines into production – with other companies assuming a higher gold price, and more willing to fund lower margin projects.

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