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Kinross acquired the Tasiast gold mine in Mauritania in 2010.
Kinross acquired the Tasiast gold mine in Mauritania in 2010.

A rush and a reckoning: Why writedowns are plaguing mining companies Add to ...

Now Barrick is paying the price for its recklessness. In the past year, the stock has plummeted 34 per cent and Aaron Regent, the CEO who struck the Equinox deal, has been replaced by Mr. Sokalsky. A similar shuffle took place at a slew of other mining firms who have replaced their acquisition-hungry chiefs with conservative executives who can focus on costs and organic growth.

Kinross Gold Corp. is another example. But the fallout from a mistake by previous CEO Tye Burt is still being felt. The gold producer paid $7.1-billion to acquire the Tasiast gold mine in west Africa in 2010. This week, the country’s third-largest gold producer erased another $3.2-billion from the mine’s value, bringing its total project writeoff to $5.5-billion.


Ultimately, the writedowns have hurt investor confidence, wreaking havoc on an industry already suffering from disillusioned shareholders.

Historically, major gold miners financed their projects by selling new shares, but burned investors are less willing to pony up now for equity, forcing miners to resort to alternatives such as the bond market. Last year, mining companies raised $49-billion (U.S.) in debt, up from just $19-billion in 2010, according to CIBC World Markets.

Acquisitions for junior mining firms are also rare these days, hurting the smaller players who depended on being bought out by a bigger miner. “One of the messages that we’ve had is that in this challenging environment, we’re not building any new mines,” Mr. Sokalsky said, meaning he’s focusing on projects he’s already got, rather than buying new resources.

The transition won’t be easy. Juniors must often finance on their own, a tough task when few people are willing to put money into growth stocks.

Mr. Farrant, the former Barrick controller who now runs a junior mining company, tried to raise money last year but struggled. He travelled to meet with investors in Toronto, New York, Boston, Vancouver and London, but he didn’t get one bite. Mr. Farrant pulled the IPO and eventually had to settle with raising just over $2.5-million privately.

“It’s a pretty grim scene out there,” he said.

Mark Mahaffey, co-founder of Hinde Capital, a London-based investment management firm that advises the $50-million (U.S.) Hinde Gold fund, figures a significant number of the roughly 800 to 900 precious metals companies listed on Canadian indexes need to disappear, either by going out of business, selling out or merging. “You can’t have 20 different companies with single mines in close proximity to each other” chasing the same investor dollars, he said.

But wary CEOs could mean a further slowdown in M&A in a mining industry already suffering from a financing drought that has persisted almost without respite since the global economic crisis. That means fewer new projects will not make it to production.

There are also big question marks around intermediate-sized miners, many of which were once takeover darlings. Case in point: Osisko Mining Corp., which operates the Canadian Malartic mine in Quebec. Last year, the largest completed mining takeover in Canada topped out at $1.5-billion, so the likelihood of a bid for a company like Osisko, with a market value of $2.5-billion, is now much lower.

But Osisko is also getting squeezed in the equity markets because it was recently stung by higher development costs and lower-grade ore. Shareholders have punished the stock, sending it plummeting 45 per cent in the past twelve months, making selling new shares a more difficult proposition.


The good news is that eventually the same challenges afflicting the industry today will drive it upward tomorrow.

If miners scale back on new projects, supply will suffer and metal prices will rise. Plus, the sweeping mismanagement across the industry can be fixed. The new cast of CEOs have already pledged greater transparency on costs and those who are the most zealous on this front are likely to be rewarded by shareholders for delivering more tantalizing profit margins.

“It’s starting to get interesting again, particularly [for] the senior golds,” said Keith Graham, president of Toronto-based Rondeau Capital, an independent investment management firm and a seasoned Canadian portfolio manager.

His take: Mining is an industry racked with poor capital allocation management and unrealistic cost and timing expectations. But there’s money to be made – he’s done it himself – and now could be the optimal moment to wade back in because so many of these miners are now out of favour.

Of course, there is one criterion that must absolutely be met, he argued. “If the price of gold stays where it is or goes up, there could be real value in the senior golds. But management has to be more cautious with their capital.”

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