While some gold companies may boast attractive valuations at the moment, the atmosphere for mergers and acquisitions in the sector has cooled down considerably in the last year or so, says Jamie Sokalsky, president and chief executive officer of Barrick Gold
At the Bloomberg Canada Economic Summit this week, Sokalsky said the general mood is “anti-M&A” in the gold space, particularly at the senior level.
Although valuations are low, Sokalsky noted that such acquisitions might require billions of dollars in additional investment to build a project, while achieving production may take a long period of time. Investors are also hoping for free cash flow, which he said they would perhaps rather see “returned to them in a higher dividend at some point.”
Sokalsky also said that a trend amongst mining companies in the last 10 to 20 years toward chasing production for the sake of chasing production has “ultimately has come back to bite the industry” with a drop in the gold price affecting rates of return on some of those investments.
“We’ve been on a treadmill as an industry where we take the money that we’ve earned as the gold price has gone up and just plowed it back into ever increasing projects – higher cost projects, higher operating costs, higher capital costs, and ultimately didn’t see the returns of cash that investors anticipated and so we need to really change our mindset as an industry and for us, what we’re doing is we’re actually reducing our production on previous targets, because those returns on that production wasn’t high enough,” he said.
“Ultimately, you can’t just keep relying on the gold price and that’s how we’re running this business; it’s a greater focus on a greater return,” he added.
Broadly, he noted, the industry’s paradigm is shifting toward returns driving production, rather than the other way around. After his appointment as CEO last June, Sokalsky initiated a review of Barrick’s mines and projects “to evaluate their rates of return and ability to generate free cash flow as part of a more disciplined capital allocation framework.” The company is also looking at selling a number of non-core assets.
Ultimately, Sokalsky said divesting smaller, higher-cost assets and focusing on a suite of long-life, low-cost assets could be a better investment proposition.
“For Barrick, if we became smaller but made more money and we’re more valuable, that’s absolutely something that we would do,” he said.
At the moment, Sokalsky said that Barrick remains committed to addressing environmental issues at its Pascua-Lama project, which sits on the Chile-Argentina border. The project, in which Barrick has $5 billion invested to date, is currently suspended on the Chilean side until environmental issues are corrected. Sokalsky explained that the company will be able to decide on a path forward for Pascua-Lama when it receives additional information from the Chilean government, which it expects in the next few months.
When it comes to the gold price, the metal’s recent moves represented a major mid-cycle correction in a long-term bull market, said Sokalsky. In the medium-term, he said, getting back up to the $1700 to $1800 range is achievable.
“There are times when the cycle will set back and I think the ultimate factors that are in place for a continued rise in the gold price are still there,” he said.
No positions in stocks mentioned.