The final day of the four-day Mines and Money (M&M) conference in London started with a keynote presentation from the president of Agnico Eagle Mines Ltd, Ammar Al-Joundi, who told delegates that the mining industry "has to change". He described himself as "confident" that the market will force a significant restructuring during the next two years because of a shortage of funding and too few quality assets. He added that, without this change, "many juniors and intermediate companies will become irrelevant".
Mining Beacon (MB) caught up with Mr Al-Joundi after his presentation and asked him what has changed to justify his comments to delegates?
Ammar Al-Joundi (AAJ): The industry's old reality included growth at any cost, significant levels of exploration and the ready availability of equity finance. This has changed since 2011, with gold bullion having underperformed the S&P 500 and gold equities have underperformed gold bullion. By my calculation there has been a 60% destruction in equity values over the past seven years, and this has only partially been due to the lacklustre performance of the underlying metal.
MB: Who is to blame, is it senior mining executives?
AAJ: Yes. The gold-mining sector has been guilty of two big sins over the past 20 years. The first is the destruction of capital value by adding marginal ounces to mine plans. Grades fell for the first 10 years of this millennium and have remained static since 2011 despite a lacklustre gold price. The second sin is undisciplined mergers and acquisitions (M&A), with US$80 billion of write downs since 2010, 75% of which have been due to poor M&A deals. Indeed, senior gold producers have collectively lost some US$160 billion in value since 2010; this has effectively destroyed the specialist gold funds.
MB: What affect has this had on investor sentiment?
AAJ: Institutional holdings in gold equities has fallen 70% since 2011. Finance is now only available, in quantity, from generalist funds, and these, in turn, have little interest in the exploration sector.
MB: Even if funds were available, you told delegates that there is a shortage of good-quality gold deposits, can you explain?
AAJ: There are a total of 132 global gold-development projects in which, theoretically, we might be interested (based on data from S&P Global Market Intelligence and National Bank Financial). Of these, 85 are owned by juniors (so are available for purchase), with perhaps a maximum of 76 being in the 1st or 2nd cost quartiles and 44 of these being in low/medium-risk environments. We estimate that only 19 are likely to be capable of producing over 150,000 oz/y, which is Agnico Eagle's threshold for investment. Indeed, we believe that the actual M&A target is probably only 5-10 gold projects.
MB: What is going to be the outcome of this scenario?
AAJ: Exploration expenditure fell every year between 2012 and 2016 (down two-thirds in total), and although there was an upturn in 2017 and again this year, there is a dearth of projects in the development pipeline. We expect gold production to all 15-20% by 2025, so smart M&A is required to fill the gap left by the drill rigs.
MB: "Smart" M&A?
AAJ: Mergers and acquisitions need to reduce political risk and add value to shareholders. This can only be achieved through better due diligence to ensure the transaction helps increase the company's relevance to investors. I also anticipate an increase in strategic alliances.
MB: Is there still a role for exploration by the majors, such as Agnico Eagle?
AAJ: Certainly. We are still adding value through the drill bit; indeed, the weighted average cost of Agnico Eagle's purchased gold is US$116/oz, compared with only US$31/oz for discovered gold. This is perhaps why the Agnico Eagle share price has grown at a compound annual growth rate of 11.4% since 1998, compared with a growth of 7.5% in the spot gold price (and 4.4% in the S&P 500).
MB: Thank you.