The Gold Producers

Though gold prices surely helped balance sheets, industrious optimization works and strategic investments in organic growth have also helped. Discipline is what producers have mastered during the bear market years and is what they profess to practice in a bull market too. Instead of relaxing at comfortable margins, gold producers insisted on increasing margins further. Jorge Ganoza, the CEO of Fortuna Silver Mines (TSX: FVI), calls himself ‘price agnostic,’ which reflects a universal position taken by gold executives who declare they prefer to focus on their assets’ fundamentals rather than on gold fundamentals. By paying attention to the variables within their control, producers can prepare to survive in any price environment. “Although I am an eternal bull on precious metals, gold is a cyclical commodity and some years will be better than others,” said Ganoza.

Indeed 2020 was an unusually good year, gold prices climbing 25.6% year-on-year to an annual average of US$1,858. But the World Bank expects a lower gold price average of US$1,775 for 2021, which it eventually projects to drop to US$1,400 by 2030. A scenario of ‘stagflation,’ or recession-inflation, characterized by concomitant negative or flat growth and higher costs, has been presented by the World Gold Council, in an article emphatically called ‘Stagflation Rears its Ugly Head.’ The World Bank theorizes that stagflationary conditions could hit equities hard, adding upward pressure on gold prices. Inflationary worries seem to have given a light push to gold prices in the autumn months. The US Federal Reserve reporting a 30-year high for inflation in October sent good gains bullion’s way.

Two contrasting economic scenarios are conceived - a rosy economic recovery and gold’s demise versus prevailing global uncertainty matched by currency fallouts – as well as a third middle-ground dialectic of protracted uncertainty and continued volatility. Using much more conservative price baselines, in the US$1,300-1,400/oz range, mining operators have worked hard to keep their AISC low and ensure sustainable margins in a worst-case scenario. In the more expensive price quartile, Australian mid-tier Resolute Mining (ASX: RSG), with mines in both Mali and Senegal, operates at an AISC of US$1,290-1,350/oz. Its CEO Stuart Gale told GBR that the company has taken different measures over the past 12 months to improve production metrics that he thinks will become visible soon. Other producers in the region mine at under US$1,000/oz.

“This is the best time for mining companies to invest in cost optimization solutions to sustain their business when the gold prices dip,” said George Arhin, partner at PwC Ghana, urging that the industry must invest now.

And investing they are. Before adventuring to exciting acquisitions, West African producers doggedly assess opportunities to improve productivity and expand the life of their existing mines through near-site exploration. In 2017, Gold Fields began a reinvestment plan at Damang and is on track to replace the depletion of mineral reserves at Tarkwa for a third time, after achieving this performance consecutively in the last two years. Resolute is also focused on expansion opportunities close to existing infrastructure, at both Syama, where it reported positive drilling results from the Tabakoroni prospect, and at Mako. Diversifying to a third jurisdiction, Resolute is carrying out early exploration in Guinea.

Consolidations

A few head-turning transactions took place in West Africa in the last two years. The region created its first supermajor when Endeavour acquired another West African producer, Teranga Gold. Also, the first Latin American-focused producer stepped into West Africa through the acquisition of Roxgold, with a mine in Burkina Faso and an advanced exploration play in Ivory Coast. Earlier this year, a potential merger between Anglo Gold (JSE: ANG) and Gold Fields sparked the imagination of the industry when the respective CEOs of the two majors said they would consider an operational JV between their Iduapriem and Tarkwa mines. The two mines sit 10 km apart from each other in Ghana. Combined, they would produce 800,000oz/year.

So, what is driving these consolidations and gestures of potential consolidation?

2021 was surely a popular year for high-end consolidation. The blockbuster Kirkland-Agnico Eagle US$24 billion merger created the world’s third-biggest gold miner. Following the Teranga acquisition, Endeavour became the world’s 10th biggest. Large-scale consolidation is driven, first of all, by the desire to create efficiencies, integrated assets proving that the sum can be greater than its parts, whether these parts are in synergic geographic position or a complementary financial position. This was the case for the merger between Teranga’s Sabodala asset with Barrick’s (NYSE: GOLD) Massawa. Conjoined, the two mines became a tier-one operation. When Endeavour bought Teranga, it came into the possession of not just two mines located close to each other, but the largest mine in Senegal – the Sabodala-Massawa complex.