For world's top gold miners, growth no longer a dirty word

TORONTO/VANCOUVER (Reuters) - After five years of painful belt-tightening, the world’s biggest gold miners are starting to cautiously loosen their purse strings and spend more money to find new deposits and build mines.

Several miners said this week that they have hiked budgets for exploration, construction and expansion projects. The plans, detailed in financial reports and conference calls, come as top producers face a “production cliff”, with some analysts forecasting a sharp drop in their output in just four years due to under-investment.

If the gold industry fails to reverse the decline in production and reserves, it risks irrelevance, warned David Garofalo, chief executive officer of Goldcorp Inc, the world’s third biggest gold miner.

Many top miners said they have made it through the worst of a draining effort to slash costs and bloated debt loads. The austerity measures came as the industry’s high-priced acquisition spree was followed by a slide in bullion prices in the four years through 2015.

“They have excess cash flow to spend that’s not going to be solely dedicated to interest expense and paying down debt, and so they’re using that on growing and sustaining the business now,” said Chris Mancini, a Gabelli Gold Fund research analyst.

“We’re in a much different position today than we were 18 months ago, or a year ago,” he said.

For the first time in at least four years, Barrick Gold Corp lifted its exploration budget, saying it will spend $185-$225 million this year, a sizeable jump from $132 million in 2016.

The world’s biggest gold miner will also expand its hunt beyond trusted core districts, to so-called ‘greenfield’, or uncharted, areas.

“2014-15-and-16 were heavy lifting years,” Barrick President Kelvin Dushnisky told Reuters. “We’re really enthusiastic about 2017 ... there’s a high degree of motivation and enthusiasm for taking the company to the next level.”

Barrick will stick to its disciplined approach to spending, he said, and the goal of any growth is bigger profit margins and increased free cash flow.


Big miners that do not invest in growth now will hit a “production cliff” in 2021, said National Bank Financial analyst Steve Parsons, because it typically takes about four years to engineer and build a mine.

Between 2021 and 2025, National Bank estimates output for the 17 gold miners it tracks will plunge by 34 percent.

Some analysts say mergers and acquisitions are the only solution for miners facing sharp output declines and lacking sizeable in-house development projects. But appealing target companies are scarce.

“People talk about heading into an M&A environment. There is the desire for M&A, there’s just nothing to buy,” Parsons said.

Agnico Eagle Mines approved spending of more than $1.2 billion to build a new gold mine in Canada’s Arctic and expand another operation there. That could boost its production into the big leagues, at 2 million ounces by 2020.

The Toronto-based miner, which increased its dividend last year, will focus investment on expanding its Nunavut operations for “the next few years”, rather than its dividend, Chief Executive Sean Boyd told Reuters.

Companies with a strong pipeline of in-house development projects are ideal investment targets, said Darren Lekkerkerker, portfolio manager at Fidelity Investments.

“I want to own the miners that, over time, can grow their net asset value per share and, typically, they will do that through growing their reserves and production,” he said.

Goldcorp unveiled an ambitious growth plan last month to boost output and reserves by 20 percent over the next five years.

“Growth is not as dirty a word as it was a couple of years ago,” CEO Garofalo said at the time.

Reporting by Susan Taylor in Toronto and Nicole Mordant in Vancouver; Editing by Denny Thomas and David Gregorio