Existential Crisis’ for Gold Miners to Spur Deals, CEO Says

JOHANNEBURG (Capital Markets in Africa) – The global gold industry is ripe for consolidation as it’s facing a crisis because of dwindling reserves, according to David Garofalo, head of Goldcorp Inc., who flagged the potential for more deals little more than a month after Barrick Gold Corp.’s merger with Randgold Resources Ltd.

“Right now, as an industry, we’re facing an existential crisis because reserves are declining and have declined rapidly,” Garofalo said in a Bloomberg TV interview in Melbourne on Wednesday. “If we’re not replacing the assets that we’re depleting every day, then we’re going to stop existing.”

The world’s biggest miners are increasing spending for the first time in half a decade as well as pursuing more takeovers. The value of M&A in the sector has already surged to the highest in six years, spurred by deals including Barrick’s $5.4 billion acquisition of Randgold. While gold prices have advanced this month — easing pressure on miners — they’re still lower over the past year as the Federal Reserve has hiked interest rates, aiding the dollar.

Consolidation in the industry “is inevitable in light of declining reserves,” Garofalo said. “We’ve been actually acquisitive over the last couple of years. We’ve introduced projects into the pipeline that not only grow our reserves but grow our production out responsibly over the next four or five years.”

The combined gold reserves still buried in mines — an indicator of production prospects– shrank by almost half to 11.3 million ounces last year, from its peak in 2012 after companies cut spending on exploration and development of new projects, according to Bloomberg Intelligence data on 15 big producers.

Drills Out
Vancouver-based Goldcorp has been expanding reserves, targeting 20 percent growth over the next three years, as it drills out its existing portfolio of high-quality operations and development stage assets are brought to the pipeline, Garofalo said.

The company’s shares are set to post a fifth monthly decline in October, and tumbled to a 16-year low last week. The latest drop followed a worse-than-expected third-quarter loss, and Goldcorp has dropped out of the top three gold miners in North America based on market value.

Spot gold traded at $1,218 an ounce on Wednesday, up more than 2 percent in October after a run of six monthly losses. It’s 6.5 percent lower in 2018.

Still, there may be some upside. Garofalo sees a “runway” for further gains in gold prices as the metal has rallied in previous tightening cycles. From mid-2004 to June 2006, when borrowing costs rose to 5.25 percent, bullion surged more than 50 percent. Since the Fed started increasing rates at the end of 2015, gold is up only about 15 percent.

In a separate interview with Bloomberg TV from Melbourne, Gold Fields Ltd. CEO Nick Holland also highlighted drivers for prices, while not making a prediction. While financial markets are concerned about further U.S. hikes, the trade war and turmoil in equities, the stronger dollar is probably the biggest headwind for bullion right now, according to Holland.

Source: Bloomberg Business News