As gold prices soar, mining companies find themselves under attack from their largest investors
For much of September, gold has been trading at its highest price in years, and yet gold mining companies, large, small and in-between, find themselves under attack from their largest investors.
On Thursday, the day gold stood at US$1,502 per ounce — a high-point not seen since 2013 — a coalition of investors released a report that bashed gold mining executives for spending too much money on general expenses.
The Shareholders Gold Council, founded in 2018 by U.S. billionaire Henry Paulson, and backed by a half-dozen institutional investors, acknowledged that gold equities have outperformed the price of gold during the past year — with one exchange traded fund rising 53 per cent compared to bullion’s 26 per cent climb this year as of Aug. 20. But the report notes gold equities have underperformed over any longer time horizon up to 10 years.
The report points to “cost control” as the number one problem that mining companies must prioritize.
“The inescapable conclusion of our analysis is that gold producers are significantly mismanaged from a G&A (general and administrative expenses) perspective,” it states.
Specifically it looks at 47 companies, of varying size, and ranks their expenses as a percentage of cashflow, or EBITDA. Expenses include general and administrative as listed on income statements, and stock-based compensation.
Surprisingly, for the report’s authors, the mid-tier gold producers were the “most inefficient” with the highest median expense to cash flow ratio, at 12.7 per cent, even compared to single asset gold producers, 10 per cent, and senior companies, 8.2 per cent.
The inescapable conclusion of our analysis is that gold producers are significantly mismanaged from a (general and administrative expenses) perspective
Shareholders Gold Council
Among senior gold producers, Evolution Mining Ltd., Barrick Gold Corp. and AngloGold Ashanti Ltd. ranked the best, in that order, with ratios of 4.5 per cent, 4.6 per cent and 4.8 per cent. The worst performers by this metric were Polymetal International Plc., Kinross Gold Corp. and Agnico Eagle Mines Ltd., coming in at 17.5 per cent, 11 per cent and 10.3 per cent.
In comparison, a group of non-gold producing miners that included Teck Resources, Lundin Mining and Vale, had an even lower median expense to cash flow ratio of 4.2 per cent, according to the report’s analysis.
“Generally speaking, gold mining is simpler than other types of mining, including because of the fact that gold doré bars can be transported at a very low costs by plane (sic),” the report notes.
It recommends that mid-tier gold producers “pursue nil-premium mergers of equals” to create more efficient management structures.
The idea of no-premium mergers has gained currency since Barrick Gold earlier this year completed a no-premium acquisition of Randgold Resources Inc. While that deal is considered a success, with Barrick’s stock price up 27 per cent since January, it’s not clear investors are willing to accept such offers in all cases.
Subsequently, in May, Barrick offered a negative premium to buy out the minority shareholders in its subsidiary Acacia Mining Plc., but in July, ultimately wound up paying a 28.2 per cent premium to the 20-day volume weighted average price to acquire the remaining shares.
Earlier in the year, Barrick also made a hostile, no-premium offer for Newmont Mining Corp. that it agreed to walk away from after the two companies formed a joint venture in Nevada, where each holds significant assets.
The report offered more general advice to the smaller, single asset companies, recommending that once they reach operational stability, they look to sell themselves or find “value-accretive opportunities.”
“Single asset producers need to resist the temptation to create corporate structures … that may not be adding any value,” the report notes.