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 The struggle between Goldcorp Inc <G.TO> and deal partners Yamana
Gold Inc <YRI.TO> and Agnico-Eagle Mines Ltd <AEM.TO> underlines the
appeal of buying a mine, in this case Osisko's Canadian Malartic
gold mine in Quebec, rather than building one.
A report on Friday that there have been recent merger talks between
the world's two top gold producers, Barrick Gold Corp <ABX.TO> and
Newmont Mining Corp <NEM.N> further illustrates a buy rather than
build mentality that has overtaken the industry — cost cutting would
likely be a key part of any such deal. The talks have broken down,
according to the report from the Wall Street Journal, which cited
unnamed sources.
There have been numerous development cost overruns on major mining
projects around the world in recent years and the time it takes to
get permission to develop sites has been getting longer amid tighter
regulation and opposition to mining from environmentalists and local
communities.
For example, it usually takes between seven and ten years to get
permits for a mine in the United States, according to a 2013 survey
by mineral industry advisory firm Behre Dolbear Group Inc. In 2009,
it took between five and seven years.
Strengthening the buy-versus-build case is price: the market prices
for gold companies have plunged by an average 60 percent since
September 2011 as the gold price tumbled from a record high of
$1,920 an ounce to below $1,300 now, a drop of about a third.
Toronto-based miners Yamana and Agnico are now offering $3.6 billion
for Osisko, 50 percent higher than Vancouver-based Goldcorp's first
offer in January and 11 percent above its last, sweetened offer.
The bidding war may be the clearest sign yet that the slump in asset
values is coming to an end.
Industry insiders don't expect a flurry of such deals due to the
scarcity of attractive assets and as miners try to rein in costs
after a spate of expensive acquisitions made in 2010 and 2011 as
bullion soared to its peak.
"The truth is, there just aren't that many good mines around," said
Adrian Day, chief executive of Maryland-based Adrian Day Asset
Management.
He said that the more aggressive major companies "are going to take
a look at good assets ... however you define good — low cost, long
life, good jurisdiction."
Canadian Malartic, which produced its first ounce of gold in April
2011, checks these boxes. Along with a 14-year mine life, Osisko
forecasts the mine's cash costs, a measure of mine site expenses
such as ore extraction and processing, will fall to between $527 and
$577 an ounce this year from $679 in the fourth quarter of 2013.
That is well below the global industry average of $767 an ounce in
2013, according to metals consultancy Thomson Reuters GFMS.
Located in Quebec's prolific Abitibi mining district, the Canadian
Malartic open-pit mine contains nearly 9.4 million ounces of gold
reserves and is expected to produce some 600,000 ounces of gold a
year over its life. It is Osisko's only operating mine, another
attractive feature for would-be purchasers.
"When looking at a transaction you have to consider its level of
complexity and what other baggage comes with it," said Shea Small, a
partner at law firm McCarthy Tetrault's Toronto office.
INDUSTRY EVOLUTION
Rising gold prices unleashed a decade of mine building from 2000 as
the value of in-the-ground resources climbed. But with bullion's
slump over the past 2-1/2 years, mine projects have been halted as
spiraling development costs made them uneconomic.
A high-profile example is Barrick's <ABX.TO> Pascua-Lama project on
the Chile-Argentina border, which the company shelved last October
after development costs soared to $8.5 billion from about $5 billion
two years earlier.
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In this lower gold price environment, miners' appetite for risk has
shrunk.
"Development assets are more attractive than exploration assets
and production assets are more attractive than development assets,"
said Mike Elliott, global and Asia-Pacific mining and metals leader
at consultants EY, based in Sydney.
As well as the regular costs in time and money of getting the
permits needed for development, corruption in some parts of the
world is also making projects unattractively expensive.
Many mining companies have to be wary of global anti-bribery laws in
countries such as the United States, and in coming years, in Canada.
They can be in breach of these laws if they bribe foreign officials
anywhere in the world.
Miners are moving away from higher political risk countries in
Africa, Central Asia and even South America and moving back to
established mining markets such as Canada.
The experience of miners such as Canada's Centerra Gold Inc <CG.TO>
in Kyrgyzstan, where riots have broken out in support of calls by
opposition politicians to nationalize the company's Kumtor mine,
have been instructive to others.
Several analysts have said Yamana's pursuit of Canadian Malartic
will help the company, whose mines are in South America and Mexico,
reduce its geopolitical risks.
"I think the industry is clearly in a phase of evolution," said Sean
Boyd, Agnico-Eagle's Chief Executive Officer.
"Companies are trying to restructure their portfolios and move out
of assets that are difficult to run and complex and go toward assets
in a smaller portfolio that are easier to manage and that can
generate those solid returns," he said.
REPEATING THE PAST?
Over the past two years, the gold industry under pressure from
disgruntled shareholders, has put itself on a strict diet, slashing
operating and exploration costs. Acquisitions have also dried up.
The Yamana and Agnico-Eagle offer for Osisko is the gold sector's
biggest in more than a year.
Shareholder disapproval of aggressive dealmaking, and the lack of
candidates, will likely limit the number of further big deals.
The name most frequently mentioned as another appealing target is
Detour Gold Corp <DGC.TO>, which like Osisko has a single, producing
mine in Canada. But the Detour Lake mine, which poured its first
gold a year ago, is a higher-cost operation: it forecasts total cash
costs at between $800 and $900 an ounce this year.
Where the bidding stops for Osisko will reveal whether miners have
learnt lessons from the sector's recent penchant for overpaying for
assets.
"We think the war is entering a dangerous phase, as buyers are
threatening to erode potential returns with higher and higher bids,"
said Kristoffer Inton, an analyst at Morningstar in a note to
clients about the takeover battle.
(Reporting by Nicole Mordant in Vancouver;
additional reporting by
Allison Martell and Euan Rocha in Toronto; editing by Jeffrey
Hodgson, Martin Howell)
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