Precious Metals

Gold producers awash with free cash flow as PM prices consolidate

“Embedded in every crisis is a fantastic opportunity,” stated Barrick chief Mark Bristow, paraphrasing Winston Churchill, a sentiment surely shared by Ontario’s mining producers in 2020. The year of Covid saw spectacular results for precious metals producers, with many companies recording record free cash flow (FCF), led by Newmont and Barrick, which both produced US$1.3 billion FCF in Q3 alone.

Gold was already burning brightly before the pandemic, surpassing US$1,650/oz in February 2020, but the unpresented printing of fiat currencies in the wake of the Covid-19 crisis fuelled gold’s fire and sent it to an all-time high of US$2,076/oz in August. The correction that followed has taken the wind out of gold’s sails to some extent, but even at US$1,800, any producer worth their salts should be making money hand over fist.

Although results have been eye-catching, there has been no shortage of challenges. In the case of Barrick (TSX: ABX), Covid was not the only hurdle to overcome, as Bristow referenced the Pascua-Lama process in Chile, the coup in Mali, integrating Nevada Gold Mines with Newmont, and the Porgera situation in Papua New Guinea among the list of challenges to overcome. He also mentioned the case of Barrick’s Hemlo mine in Ontario, which was under debate after the Randgold merger and decision to focus on tier-one assets.

“Hemlo is a world-class asset that has been mined for a long time and has produced an enormous amount of gold, where people made money almost in spite of what they did. Then came the end of the easy living and people gave up,” said Bristow.

However, realizing that Barrick is underinvested in Canada, as well as having an accumulated loss and corporate expenses in the country, the decision was made to reinvest and modernize Hemlo. Barrick went back underground and consolidated the east and western extensions of Hemlo on the greenstone belt, as well as bringing in Australian mine contractor Barminco to help transform the way the underground mining operation is run. Bristow added that Barrick’s operational and corporate changes and geocentric approach have given Hemlo a 10 year horizon to add between 220,000 to 250,000 oz/y, profitable at US$1,200 gold.

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For Kirkland Lake Gold (KL) (TSX:KL), 2020 was a transformational year, growing its profile into a junior/senior company with the acquisition of Detour Gold in January. KL achieved record production of 1.37 million oz in 2020, a 41% increase year-over-year from 2019, through its portfolio of three cornerstone mines with Macassa and Detour Lake in northeastern Ontario, and Fosterville in Australia.

Since coming under KL control, Detour Lake has had an immediate impact on KL’s bottom line, contributing 516,757 oz of production in its first 11 months. “We feel that this was the right deal at the right time for Kirkland Lake,” president and CEO Tony Makuch expressed. KL’s long-term vision for Detour is far more ambitious, and Makuch contends that Detour is poised to post stronger results in 2021, with production targeted to reach between 680,000 to 720,000 oz/y.

The company sees many parallels to its Fosterville asset, and is aiming to emulate that success by following a similar model of aggressive exploration. “Detour Lake has the potential to be one of the largest gold mines in the world, and potentially one of the world’s most profitable as well,” asserted Makuch.

Another of Ontario mining’s success stories in recent years is Wesdome Gold Mines (TSX: WDO), which joined KL on the TSX30 list for the second year running in 2020. Wesdome met the low-end of its 2020 guidance with 90,278 oz mined at its Eagle River mine at a head grade of 14.2 grams per tonne, despite dealing with Covid challenges. Duncan Middlemiss, Wesdome’s president and CEO, related that drilling at both Eagle River and Kiena had been particularly impacted by the pandemic, but the company had big plans for both properties in this regard in 2021.

Speaking of the potential he sees at Kiena, Wesdome’s Québec asset which could be up and running by the end of 2021, Middlemiss stated: “Kiena has a great land position of 70 km2 with a lot of potential evident through historical results from past mining operations, many of which closed when gold was at US$35/oz. Furthermore, some of these operations were constrained by land, but Kiena is an amalgamation of 12 to 15 previous properties, so now we can explore the full potential.”

With the company in a position to organically fund the modest startup at Kiena to the tune of C$40 million (according to the PEA), a tangible path to become a 200,000+ oz/y producer and double production in the near-term is within reach. Middlemiss concluded: “If gold remains at these levels, Wesdome is going to be a cash-flowing cow, and there will also be possibilities to inorganically create value. This is what it is about: we are not just chasing ounces, but focusing on high-grade gold in the Abitibi region.”

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Multi-asset mid-tiers

Alamos Gold (TSX: AGI) has experienced considerable growth in recent years, transitioning from a single-asset producer with its Mulatos mine in Mexico, to a multi-asset mid-tier with three producing mines, two of which are in Ontario: Young-Davidson and Island Gold. John McCluskey, AGI’s president and CEO, discussed the build out and commissioning of the deep levels of Young-Davidson which has taken the mine from 6,000 tonnes per day (mt/d) throughput capacity, to 8,000 mt/d.

“Once all that infrastructure is in place, it takes some time to ramp up because of the necessary stope sequencing: you need enough stope faces open to supply the ore,” explained McCluskey, and the inventory of broken ore stockpiled during the Covid-19 lockdown that lasted until July allowed AGI to test this capacity once the shaft had been commissioned, pushing material through at 8,000 mt/d for six weeks straight. “By Q3 2021, we will be able to put 8,000 mt/d through the mill consistently, which will continue for 13+ years. Costs at the mine have come down as we now benefit from economies of scale and a more automated system that requires minimal handling,” he elaborated.

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AGI’s Island Gold mine has also contributed to their success, on the back of exploration that has seen the mineral endowment grow from 1.8 million oz to 3.7 million oz, and seen the grade increase significantly at death. McCluskey detailed: “At the 1,100 m level we are now looking at 19 g/mt average Inferred resource grades below the Eastern extension, up from the 10.5 g/mt average grade from 650 m depth, and 4.5 g/mt at 400 m.

Australian mid-tier, Evolution Mining (ASX: EVN), is leading the redemption of Ontario’s famous Red Lake district since its acquisition of Newmont’s Red Lake gold mine for a total consideration of US$375 million in April 2020. In the 2000s, Red Lake transformed Goldcorp into the most valuable gold company in the world after it consolidated the Dickenson, Campbell and Cochenour mines and discovered the famous 7 million oz high-grade zone. However, the operation never really adapted to its future where it would need to mine lower grade ounces because the high-grade zone had been depleted and the operation had a high cost-structure. “In order to build a sustainable, profitable future, the mine needed to recapitalize, recalibrate and invest in the necessary exploration and development,” asserted Jake Klein, EVN’s executive chairman, who added that Newmont recognized and understood this, but had other priorities that required their focus and therefore decided to sell it. “Red Lake has got all the hardware – it’s the culture and software that we believe needs to change,” stated Klein.

These changes include decommissioning hardware and two of the five shafts, automating two shafts, shutting the Red Lake mill to fill the Campbell mill, and reducing the leadership team and workforce to streamline the operation. Exploration has also been a focus, with a new reserve statement due to be released by June 2021. “We expect the resource to grow significantly and the results of the study will indicate how best to mine it, including what is the best milling strategy, whether that be building a new mill or cooperating with other mills in the area.”

M&A in December 2020: a sign of things to come?

2020 was a more sedate year for precious metals M&A compared to 2019, which saw the Barrick Randgold merger finalized and the Kirkland Lake Detour deal announced. One of the more interesting M&A stories of 2020 was the TMAC Resources saga, as the Canadian government denied the sale of the company and its Hope Bay gold mine to Chinese state-owned company Shandong Gold Mining for C$230 million. Less than a month later, on January 5th, 2021, it was announced that Agnico Eagle would acquire TMAC for a transaction with a total equity value of C$286.6 million, a 26% premium to the C$1.75 per share Shandong was due to pay.

Is this an early sign that producers will start paying over the odds for assets, or will we look back at this deal as good value if Agnico manages to turn TMAC’s underperforming assets around? The market did not take kindly to KL’s Detour acquisition, but with gold US$400/oz higher than when the deal was announced in January 2019, and with drilling supporting the potential transition to a “super pit” concept that could substantially increase production, perhaps other cash-rich producers would be wise to act before gold reaches new highs.

Another deal that caught the eyes in December 2020 was Equinox Gold Corp’s (TSX: EQX) announcement it would acquire Premier Gold Mines Limited (TSX: PG) in an all-stock deal valued at C$611.7 million. EQX chairman Ross Beaty, who fully underwrote a C$75 million equity financing to help fund the deal, said on a call that it fits Equinox’s strategy “to grow as big as we can as quickly as we can.” Part of the deal includes the acquisition of a 50% interest in the permitted, development-ready, Hardrock project should now move quickly through development with the deep-pocketed EQX as operators of the mine.

M&A activity in Ontario gathered pace towards the end of Q1, as Evolution Mining strengthened its position in the famous Red Lake region, acquiring Battle North Gold Corp for C$343m on March 15th, 2021. “The additional processing capacity from the new Bateman mill will also accelerate our ability to achieve our objective of producing in excess of 300 000 oz/y of gold from Red Lake,” said Evolution’s Jake Klein.

Images courtesy of World Gold Council