Amid a flurry of gold sector mergers, acquisitions and proposed deals, industry experts and leaders flagged exploration underinvestment, reserve-replacement pressure and lackluster asset margins as creating challenges and opportunities for miners and investors.
"The basic problem is that there is very little of quality to buy out there, and what quality there is, is too expensive," Brent Cook, a partner with Exploration Insights, told S&P Global Market Intelligence in an email.
Gold mining companies have announced a slew of proposed deals in recent weeks: Zijin Mining Group Co. Ltd. bid C$1.33 billion in a friendly all-cash takeover of Continental Gold Inc., which is building the Buritica gold project in Colombia, Endeavour Mining Corp. proposed a hostile takeover of Centamin PLC for C$2.52 billion and Kirkland Lake Gold Ltd. announced a C$4.9 billion friendly all-share merger with Detour Gold Corp.
Mining sector experts and CEOs expect sector consolidation to continue, but said refilling reserves with high-quality assets may prove a challenge for gold miners. They pointed to underinvestment in exploration in recent years along with a decline in top-tier gold discoveries as creating obstacles for gold miners as they try to fill holes in depleted production pipelines.
"There are very few companies that can maintain current gold production five and 10 years out," Sabina Gold & Silver Corp. President and CEO Bruce McLeod told S&P Global Market Intelligence. "Boards of directors generally look at five-year strategic plans and I feel that more and more boards will start asking the questions on how can they sustain, let alone grow, their current production. With such a small percentage of their spend going into exploration, it doesn't seem that many will be able to maintain their production profile organically."
The bottom line for the miners and explorers is they need to find more deposits, especially higher quality ones, according to Cook. But as he and others have noted, deposits are getting tougher to find while exploration budgets have declined and stagnated in recent years. "This is exacerbated by an investment mindset that expects positive results in four months and doesn't understand the scientific process behind discoveries," Cook said.
Exploration budgets have declined in recent years while miners and explorers have placed less emphasis on earlier-stage projects, according to a recent Market Intelligence analysis. Overall grassroots budgets declined 1.4% in 2019 to US$2.47 billion, accounting for about 27% of global exploration budgets and just one percent above an all-time low of 26% set in 2018. Including late-stage and minesite exploration, total 2019 exploration budgets were US$9.29 billion, while in the gold sector, grassroots exploration budgets declined 0.03%, according to the analysis.
Kevin Murphy, a lead analyst with Market Intelligence's Metals & Mining Research team, noted there are fewer top-tier undeveloped assets on the market, in part given a decline in exploration and discoveries. "So it's easier, and in some cases necessary due to thin pipelines, to turn to acquisitions," he said.
Among some of the major gold miners, growth is off the table. Both Newmont Goldcorp Corp. and Barrick Gold Corp. have forecast relatively flat production in the coming years as they focus on cash flows, optimizing their own recent mergers and divesting noncore operations. Newmont has said it expects to produce between 6.5 million and 7.0 million ounces of gold per year in the longer term, while Barrick has pegged annual production at between 5.1 Moz and 5.6 Moz over the next half-decade.
Rick Rule, president and CEO of Sprott U.S. Holdings Inc., also pointed to underinvestment in exploration as a defining characteristic of the mining marketplace, similar to Cook. In it, Rule saw an underappreciated investment opportunity. The executive said investors appear to be laser-focused on identifying the next acquisition target that could get a premium, in something of a game of shooting fish in a barrel.
In contrast, Sprott has started taking a closer look at earlier-stage exploration opportunities, Rule said, and mining teams they can see building companies from the ground up, perhaps using assets cast off by larger miners as a base. The focus on discovery aims to leverage hefty premiums he expects will flow to top-tier discoveries in a market where they appear to be few and far between.
"Given that almost nobody else is focused on earlier-stage exploration we're spending a lot of time and money on that," Rule said. "Although there hasn't been enough preparatory work to generate a large number of high-quality tier-two, or tier-one discoveries, the rewards associated with those will be really eye popping."