Golden Times for the Production Sector?

Gold rises as economies fall

“A wise person once told me that he knows exactly what the gold price is going to do: it will go up, then down, but he was not sure in what order and when,” shared Alistair Cowden, executive chairman of Firefinch, a Mali-focused developer formerly known as Mali Lithium. As this anecdotal insight points out, the gold market is highly unpredictable, so much so that, despite a strong rise in the gold price, the mining industry steps forward with caution, maintaining cost discipline to prepare for a time when gold prices will not be as forgiving.

Unpredictability became a buzzword of 2020. The pandemic has been so sudden and disruptive that even a shock-mitigating commodity like gold cannot be pinned down to a precise point in the usual cycle. Between 2001 and 2012, gold saw a dramatic appreciation by 638.2%, followed by multiple corrections and a slight recovery in 2017. Analysts described the period between 2016 until 2020 as “a middle-aged bull market,” with fewer levitations and a stable, upward trend in the price. But the structural changes following the pandemic broke away with this seasonality, over-driving the nominal price to the US$2,000/oz mark in August and breaking the 2011 record of US$1,900/oz. This represents a 30% yearly increase and the mark of an aggressive bull year.

John Dorward, president and CEO of Roxgold, observes that the universe of gold investors has broadened significantly: “Interestingly, people who did not traditionally invest in gold are now moving into buying either physical gold, ETFs, or stocks in mining companies (…) The old reasons against owning gold, such as the lack of dividends, are no longer a concern during zero or negative interest rates around the world. The gold market is a small one and even small inflows of investors have an impact on gold prices.”


“Because many players have exhausted their high-grade resources, I suspect a market reaction when producers start shutting down operations and supply drops, so the next five or six years should be very interesting.”

Gordon Stothart, President and CEO, IAMGOLD Corporation

Producers commit to continued discipline

The years-long exercise of controlling expenses pays off handsomely when the market turns upwards, and those who looked after costs are reaping the benefits of high margins. Based on rankings for September 2020, a third of the value of the top 50 mining companies (by market value) today is represented by gold producers and precious metals royalty companies.

There are over 40 producing mines in West Africa, many controlled by some of the world’s largest mining companies, including Newmont, Barrick, B2Gold, Endeavour, AngloGold Ashanti, Nordgold, as well as mid-tier producers like Kinross, IAMGOLD, Gold Fields, Resolute, Golden Star, and Teranga Gold. The biggest mines are the Luolo-Guonkoto complex in Mali, operated by Barrick, B2Gold’s Fekola mine, Gold Field’s Tarkwa, Newmont’s Ahafo, IAMGOLD’s Essakane, Barrick’s Tongon, and AngloGold’s Asanko mine.

West Africa’s underexplored mineralization lends itself to mostly open-pit, near-surface (usually no more than 100 meters below the surface), and thus cheap operations, and most producers operate under an AISC of US$1,000/oz, which leaves substantial margins at a spot price almost double that number. But even in underground operations, miners like Roxgold stand out with the lowest operating costs in the region, underwritten by some of the highest grades. In Q2, Roxgold reported record margins of US$1,016/oz at its Yaramoko mine in the province of Balé, Burkina Faso, which is on track to produce 130,000 oz per year. For its open-pit development project, the Séguéla Gold project in Ivory Coast, acquired last year, the PEA indicates an impressively low AISC of US$600/oz in the first three years of production, also indicating high average grades of 6.1 g/mt at its main deposit, Ancien.

“Costs are an important focus for operating companies in Burkina Faso, because security and logistical aspects require quite big investments, affecting margins considerably.”

Tidiane Barry, President, Burkina Chamber of Mines

Time to build the pipeline for the future

Toronto-based Teranga Gold, one of the top performers on the TSX with mines in Senegal and Burkina Faso, dealt with a dilemma back in 2015 when its Sabodala mine in Senegal was maturing. Teranga’s executive board pondered whether they should return money to shareholders or reinvest in the business, opting eventually for the latter. Teranga bought Gryphon Minerals in 2016, taking possession of two assets in Burkina Faso: the Wahgnion mine, which poured its first gold in 2019, and Golden Hill, an advanced exploration, grassroots discovery. “The board’s decision was based on a view that the sector had underinvested during the bull market and that, ultimately, grades and production will decline,” explained Richard Young, president and CEO of Teranga Gold.

As the cash from Q2 and Q3 this year begins to reflect on their balance sheets, producers face the same question that Teranga had five years ago: how to best take advantage of current market conditions? Strong gold fundamentals and solid cash flows allow producers the opportunity not only to pay off debts, but also to cut lower grades, expand their exploration budgets, and increase their pipelines, whether through organic or inorganic growth.

The matter of building a future pipeline is the most urgent. In the last six years, when the price of gold hovered around US$1,250/oz, mining activity continued, but exploration slowed down. Gold continued to be extracted, decreasing the total reserves as fewer deposits were discovered. Last year, the global exploration budget for nonferrous minerals declined by 3% to US$9.8 billion, according to S&P Global Market Intelligence’s “World Exploration Trends Report.” Looking at West Africa, the region’s landmark mines, including Morila and Obuasi, are reaching the bottom end of their existing resources, and even producing mines such as Gold Field’s Tarkwa or IAMGOLD’s Essakane mine have between 10 to 15 years of LOM. As the high-grades resources are exhausted, mining companies can either develop their own assets or buy assets to replenish these reserves, and if the gold price maintains its strength, they will have the money to go either way.


Based on data from Mining Intelligence, Gold Fields has raised US$251,845,42 this year. For the first time in 15 years, Gold Fields managed to replace the depleting reserves at its low-grade, high volume Tarkwa flagship mine in Ghana, which produces over 500,000 oz/year: “Over the years, I believe we did not offer Tarkwa its fair chance for exploration, and so we have now changed strategy and launched an aggressive and ample exploration program”, said Alfred Baku, executive VP and head of West Africa, Gold Fields.

Moreover, Gold Fields started a reinvestment project at its high-grade Damang mine back in 2016, as well as entering a JV agreement with Galiano Gold (previously Asanko Gold) for the Asanko complex on the Asankrangwa gold belt in Ghana; the deposit has a high exploration upside and reached record production in 2019.

The industry trend has been to focus on advanced-stage assets or exploration around the main mines, while budgets for greenfield exploration have halved over the past three decades (S&P Market Intelligence). Exploring around existing mines reduces the chance for large-scale discoveries. Recently though, the world’s largest producers have shown more predilection towards developing their exploration portfolios: “With its refocus on geology as a core discipline, Barrick’s exploration programs span the continent’s main gold belts, where it is hunting for new Tier One assets as well as for additional reserves to extend the lives of its existing mines,” Mark Bristow, president and CEO of Barrick Gold, told GBR.

Teranga Gold has two contesting development projects that could turn into a third producing mine, the Golden Hill and the Afema, and has grown its annual production from 245,000 oz in 2018 to a projected 400,000 oz for this year. After the acquisition of the Massawa project for US$100 million, Teranga will likely concentrate on organic growth.

Endeavour Mining has one of the largest exploration portfolios in West Africa and discovered 8.4 million oz since 2016. “Exploration is a key value driver and a core part of our business strategy. We remain focused on unlocking more assets and reserves, continuing to build optionality through our portfolio,” said Sébastien de Montessus, president and CEO, Endeavour Mining.

A smaller producer, Perseus Mining is completing the acquisition of Exore Resources, a small exploration company with licenses in the proximity of Perseus’s Sissingue mill in Ivory Coast- this brings Perseus a total of 2,000 km2 of land; Jeff Quartermaine, CEO of the ASX-listed producer, will be more focused on organic growth for the years to come.

“With acquisitions, shares are issued at a certain price and, if the economic fundamentals of the asset do not match the amount paid, then they will need to be written off the balance sheet. This is exactly what happened at the end of the last bull market when institutional investors became angry with the industry for having wasted a lot of money, even though it was the institutions themselves who encouraged consolidation.”

Jeff Quartermaine, CEO, Perseus Mining

What may be holding back acquisitions is that junior companies tend to be hyper-inflated due to the rapid change of sentiment in the market. James Wallbank, managing partner of specialist investment group Ibaera Capital, believes non-producing mining companies have increased extraordinarily in price, having gone from one extreme of being highly distressed to being flush with cash, which limits opportunities for M&A: “Personally, I think there are very few projects that are both economic and fairly valued. M&A is more likely to occur between mature companies in production that have both experienced valuation uplifts and can achieve strategic operational efficiencies by investing in producing mines or additional mining inventory,” he explained. One hyped-up transaction is the ongoing battle for the takeover of ASX-listed Cardinal Resources, between Russian producer Nordgold and Chinese competitor Shandong Gold. Recently, Nordgold matched its competitor’s offer for the Australian miner which is developing the 5.1 million oz Namdini project in Ghana. This would be the third price increase since March, and it shows the two companies’ commitment to the US$300 million bid. In a less mediatized transaction, Future Global Resources is acquiring a 90% stake in Bogoso-Prestea gold mine, also in Ghana, for US$95 million. Other lower-scale consolidations are represented by Hummingbird Resources buying Cassidy Gold Guinea for US$12.67 million, for a deposit of 1.1 million oz, grading 2.1 g/mt. Mining companies without projects coming live in the short-term look at acquiring assets rather than spending years developing themselves, especially not knowing how long the bull market will last. Yet, buying an asset does not help to increase global reserves, so the onus to renew the pipeline falls on greenfield explorers. While producers have taken a more cautious approach in spite of the temptingly high cash flows, juniors are ready to take more risks, rushing to advance projects to either become a valuable takeover target or move closer to production.

Image courtesy of Gold Fields