Challenge For Gold Miners Remains Growth – Sean Boyd

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The gold sector is likely to see an increase in M&A activity in the future as miners look for growth, says Sean Boyd, Agnico-Eagle vice chairman and CEO.

Speaking on Mineweb.com’s Newsmaker podcast, Boyd said that the biggest challenge facing gold miners is growth and “finding quality deposits that make sense to build”.

Asked about the trend currently emerging for gold miners to look for deposits that have significant deposits of other metals, such as copper, Boyd says that it is a trend that is likely to continue.

“There’s going to be a large consolidation phase before the remaining gold companies that are left after that phase, will be forced to diversify their revenue base away from strictly gold, because of the lack of opportunities in the space. So that’s going to happen – the skills are transferable, these companies are very skilled and can build and operate mines other than gold mines.”

But, he adds, from an investor point of view, “I don’t think these companies are going to go predominantly to metals other than gold, so the right balance will need to be struck and the smart gold companies will keep the right balance so their revenue stream is still dominated by the gold side.

On the management of these companies, Boyd is complementary saying that there is “much more discipline in the way these companies are managed versus where we were several years ago”.

And, it is this discipline that underpins his belief that gold stocks are likely to outperform the metal itself in the future.

“You’re now seeing some leadership in the space – Barrick who is the biggest and the recognised leader in the space, are now unburdened without the hedge book and that’s probably going to be reflected in their bottom line going forward. Newmont has posted some good earnings, so you’re going to start seeing people pay attention to the gold business for the quality of the underlying businesses in terms of being able to generate cash flow on a per share basis. We also think that will ultimately be reflected in a higher dividend payout per share.

He adds, “If you look at the current valuations, they’re at historical lows in terms of multiples to underlying NAV. The gold valuations are suggesting gold prices of $900 or less so we think that given historical low valuation levels, given the improving underlying businesses and the ability to generate cash and hopefully translating into improved dividend payouts; that’s going to get what we think is more non-traditional money looking at the gold space.

However, he says that if mining companies are truly going to attract non-traditional gold investors, more focus needs to be placed on cash flows.

“You’re always going to get your traditional gold investors that buy the stocks as a proxy for bullion. What the gold business needs to do is attract those other investors outside your traditional gold investors and attract them to the quality of the businesses. One of the key metrics for any business is its ability to generate net free cash flow and the gold valuations given this idea that I think the gold shares can outperform the ETFs is that we’re going to need those newer investors to come and feel comfortable investing in long term quality businesses.

And, while the industry is better than it was, Boyd admits, “It was a mishmash in the past – you had massive hedging for a big part of the last 20 years, and companies got focused more on financial engineering than they did on the operating side of the business.

” So what was also a mainstay of the business were massive equity dilutions to raise funding and as we go forward, companies are better positioned in terms of their ability to generate cash. They don’t need to dilute – at least the quality producers by raising money through the sale of equity. So the businesses are better placed. The challenge is still growth and not all of them have growth and I think that’s why we’re going to see more M&A as we move forward.”