Goldminers find lustre fading on 'big is best'
Acquisitions were once the name of the game, but now the miners are looking to spin off their assets to unlock better value, writes Liezel Hill.
The world's 10 biggest gold companies led by Barrick Gold spent more than $US100 billion in the past 20 years buying new mines and projects around the globe. Now they're feeling pressure to throw the strategy into reverse.
Gold Fields spun off most of its South African assets in February. Billionaire hedge-fund investor John Paulson is calling for a break-up of AngloGold Ashanti. Barrick, which has 27 mines, is selling assets after an acquisition and cost overruns helped erase $US26 billion of the Canadian company's market value.
An index of 14 large goldminers has lost 26 per cent in the past year, worse than the 7.1 per cent drop in a similar gauge of global oil companies. The gold industry, which underperformed the metal for five of the past seven years, has tried to stop the slide by ending gold-price hedges, raising dividends, building new mines and, most recently, pledging spending discipline. Spinning off or selling assets may be its next option.
"The next fad is going to be the unbundling of the majors," said Mark Bristow, chief executive of Randgold Resources. The miner believes the optimal number of mines is "four or five, six at a push".
Such moves would follow the example of oil companies that have split up to unlock value. ConocoPhillips spun off its refining unit in May, less than a year after Marathon Oil listed its refinery network as a separate company.
Shareholders have grown cold on further expansion as valuations in the industry declined. The ratio of the largest goldminers' enterprise value to their earnings before interest, tax, depreciation and amortisation dropped to 6.3, less than half the multiple at the end of 2010.
The goldmining strategy of bulking up was led by Barrick, which became the industry leader in 2006 when it bought Placer Dome for $US10.2 billion. Now operating across four continents, Barrick saw the estimated cost of its Pascua-Lama mine on the Argentina-Chile border more than double to as much as $US8.5 billion and it took a $US3 billion write-down on a Zambian copper mine last month.
"It's like herding cats to manage something like that," said George Topping, an analyst at Stifel Nicolaus & Co. "It's very difficult across all those different time zones, different cultures, tax regimes, politics."
Investors, weary of operational setbacks and soured takeovers, have turned to gold-backed exchange-traded products that track the price of the metal. SPDR Gold Trust, the largest gold ETP, has lost 2.5 per cent in the past year, a smaller decline than gold equities. The S&P500 rose 10 per cent and the gold price dropped 2.2 per cent in the period. Gold equities are now trading at a discount to the broader sharemarket.
"The mining industry has lost a lot of appeal because of poor guidance, poor delivery, over-promising, cost overruns," said Gerald Panneton, a former Barrick executive who is now CEO of Detour Gold. The global goldminer "is not a model that is sustainable".
To win back investors, Barrick and competitors including Newmont Mining, the second-biggest producer by sales, are promising they'll focus on margins and containing costs, rather than boosting output.
Returns will drive production, rather than the other way around, Barrick CEO Jamie Sokalsky says. Barrick will defer, shelve or sell assets that do not meet returns and cash flow targets.
"Our overriding objective is to translate the company's strengths into higher shareholder returns and we'll always consider opportunities to advance that objective," said Andy Lloyd, a Barrick spokesman.
Paulson, the biggest shareholder in AngloGold, last month told investors the miner might unlock value if it were to split its business between South African assets and those outside the country.
But there is no unanimity that the answer to the gold industry's plight lies with the breakup of established producers. Gold Fields has fallen 20 per cent since it spun out its South African assets through the listing of Sibanye Gold. The combined market capitalisations of the two companies is 17 per cent less than Gold Fields' value before the split.
African Barrick Gold has also disappointed since it was spun off from Barrick in 2010, dropping 61 per cent. The African unit has been dogged by operational setbacks and struggled to meet production targets.
Randgold, which owns mines and projects in Africa, has risen 17 per cent in New York in the past 24 months, compared with a 34 per cent decline in the Philadelphia Stock Exchange Gold and Silver Index of 30 producers. The company may sell one of its smaller assets if it found or acquired "another Kibali", Bristow said, referring to the Democratic Republic of Congo goldmine that Randgold and AngloGold jointly acquired in 2009.
"That's a perfect value creation," Bristow said in a recent presentation. "We want to have four or five mines, we think 1.5 to 2 million ounces, and focus on the quality."