Bloomberg News - From Bitcoin to Trump: Mining Giants Identify 2018's Challenges
By
Danielle Bochove
In 2017, miners finally got some tailwinds from their commodities as unsavory supply pressures -- from lower ore grades to worker strikes -- bolstered prices.
What’s ahead for 2018? We asked six top executives from companies including Newmont Mining Corp., Barrick Gold Corp. and Teck Resources Ltd. for their outlooks.
With depleting reserves top of mind, they expect more focus on exploration and inter-company collaboration to develop assets. There’s consensus that large-scale mergers and acquisitions are a thing of the past and the rising interest in bitcoin poses no threat to gold. But opinion is split on whether miners will be able to grow, or even maintain production, without letting the hard-won cost discipline of past years fly out the window.
Gary Goldberg, Newmont Mining
“Most of the companies out there are pretty healthy. So to make M&A happen, either there’s got to be some other form of value that people see, or they’re going to pay some pretty hefty premiums.”
Gary Goldberg
Photographer: Matthew Staver/Bloomberg
MARKET:
Gold should stay in the $1,200 to $1,300 an ounce range, with large breakouts unlikely
Long-term prices should be supported by strong demand from China, India, interest in gold ETFs and tightening supply
“We still see gold supply over the next five or six years dropping off from the 103 million ounce range into the mid-90 million ounce range.”
SECTOR:
Industry must address depleting reserves while maintaining cost discipline
Blockchain is “pretty cool technology,” but Goldberg has no interest in cryptocurrencies
Sees no signs bitcoin is hurting gold demand
COMPANY:
Will hike dividend at least 50 percent, details in February
Watching U.S. tax revamp for final corporate rate and clarity on how the alternative minimum tax, and especially depletion allowance, will shake out
Focus on advancing internal projects/exploration while keeping costs down
“We’re still out there competing for talent, competing for access to finances, and competing for access to resources”
No need to pay down any debt early or buy and sell assets
Still interested in buying Barrick’s stake in Kalgoorlie at the right value
On moving ahead of Barrick by market cap -- and closing production gap:
“It’s one of the many metrics that we keep track of along the way in terms of our performance.”
Kelvin Dushnisky, Barrick Gold
“Looking into 2018 and beyond, the focus is going to be returning more capital to shareholders when we can. We’ll do that through dividends or possibly share buybacks.”
Kelvin Dushnisky
Photographer: Matthew Staver/Bloomberg
MARKETS:
Sees gold in $1,200-1,300 range in 2018, with higher prices beyond
Demand from gold ETF investors, China and India, plus potential U.S. equity pull-back good for gold
Falling global reserve grades also support gold price
Biggest risk would be “an unexpected strengthening in the U.S. currency”
Copper market will be balanced in 2018 with demand exceeding supply further out
SECTOR:
Industry to stay focused on costs
Large-scale M&A unlikely as “mega-deals” of past failed to deliver value
“Shareholders are justifiably skeptical of large-scale M&A in the sector, so I don’t think you’ll see a return to that kind of activity any time soon”
Some consolidation possible through medium-sized “bolt-on acquisitions”
Hard to see cryptocurrencies replacing physical gold, which has finite supply
Bitcoin correction would offer “helpful reminder” of role of gold as store of value
COMPANY:
Plans to balance need to reinvest, cut debt, with shareholder returns
Increased focus on reserves through mine exploration and project-pipeline investment
Watching U.S. tax reform closely, believes initial concerns about AMT will be resolved
“ If that’s the case, I think we’ll be in a very good position in terms of U.S. tax”
On widening gap with Newmont:
Expects share price to improve after company provides more clarity at investor day in February around project pipeline, mine exploration and contribution of copper assets to cash flow, all of which may be undervalued by market
Don Lindsay, Teck Resources
“When the positive steelmaking-coal demand picture is combined with a supply side which is prone to significant disruptions, we see prices staying well above analyst consensus forecasts.”
Don Lindsay
Photographer: Daniel Acker/Bloomberg
MARKETS:
Steelmaking coal, zinc and copper prices all expected to be strong
Sees zinc inventories, already at low levels, continuing to fall
Production not seen filling structural supply gap
Steelmaking coal supported by healthy steel industry and improving global output
Sees strong demand from India, Europe, Vietnam, Brazil, less dependence on China
Copper supply will peak in 2019 and then move into structural deficit
Clean energy creating significant new copper demand, especially in China and India
“Current targets by China and India for solar and wind power installation could add over 10 million tons of new cumulative demand by 2030”
SECTOR:
Mining industry likely to focus on growth
For senior companies, “we think that M&A will be extremely limited”
Even distressed selling of past years was done at “very full valuations” and there are limited attractive opportunities
Some consolidation of mid-sized to small companies may be possible
Biggest challenge is maintaining discipline over costs, productivity and capital allocation
COMPANY:
Teck will focus on optimizing operations, advancing priority projects and balancing capital expenditures with shareholder returns
Internal pipeline and strong markets “will make 2018 an exciting year for Teck”
David Garofalo, Goldcorp Inc.
“Given that the general equity markets seem to be achieving new highs every two weeks, and that nominal rates are going up, I think gold has held in like a champion.”
David Garofalo
Photographer: Norm Betts/Bloomberg
MARKET:
Expects strong year for gold on inflationary pressures
Real interest rates likely to fall even with Fed hikes; if Trump policies slow Fed tightening cycle gold could benefit more
China’s gold demand will continue to exceed India’s, supply will stay tight
“I don’t know that there’s any shocks to the system that would really drive the gold price downwards in any significant way”
Physical aspect of gold will insulate it from bitcoin competition
SECTOR:
4Q 2016 was the “tipping point” for mine supply, reserves likely to fall for at least five more years
“The next challenge for us as an industry is to start to grow reserves again”
Sees more collaboration on projects to replenish pipelines
Cost efficiencies getting harder to find
History has shown “large scale M&A tends to be quite value destructive”
Miners must provide “leverage” to gold price to compete with gold ETFs which challenge producers while creating market liquidity
COMPANY:
No significant capital expenditures for new initiatives planned until 2022
“In the meantime we’re just going to harvest as much cash flow out of the existing operations, and make them as efficient as possible, and drive down our debt levels to effectively zero”
Company is preparing for next capital investment cycle beyond 2021
After that the company can start to “look at increasing the dividend over time”
Not interested in buying or selling assets
“The portfolio re-positioning is done. We’re very very comfortable with what we’ve bought”
Sean Boyd, Agnico Eagle Mines Ltd.
“Maybe it’s taken some demand away at the margins, but I actually think you can build a much stronger case for gold in an environment where bitcoin is drawing this kind of investor interest.”
Sean Boyd
Photographer: Joshua Prezant/Bloomberg
MARKET:
Sees strong demand for physical gold from China/India but little new supply
Gold could surpass $1,300 an ounce if real interest rates stay low and/or Fed tightening slows
Large generalist investors poised to buy top producers if gold price rises
“They’re only talking to the highest quality gold mining businesses out there and it’s our sense that it’s for positioning”
Trump increases desire of China and Russia to diversify away from the U.S. dollar, helping gold
Collapse of cryptocurrencies would benefit gold
“We’re going to get to a world where it’s going to become increasingly more important to know where your investments are, and that you can feel them and touch them and understand them”
SECTOR:
Biggest industry challenge is depleting reserves
$1,400 to $1,500 an ounce needed to fuel significant exploration and development
ETF threat to miners lessened as most no longer trade at high multiples to NAV
Miners likely to focus on optimizing operations and developing pipelines
Industry needs consolidation but at current gold price “everybody can muddle along”
Gold at $1,050 an ounce or lower required to “tidy” the industry
COMPANY:
Rocky Nafta negotiations could benefit Agnico by weakening Canadian dollar
“We would look at that as an opportunity to lock in some weakness in the Canadian dollar”
Further dividend increases unlikely until 2019 as spending focuses on Nunavut projects
Expects to reward shareholders onward from 2019
From 2019, cash generated from mines expected to rise by 25 percent while capex falls to roughly $700 million from $1 billion in 2017 and 2018
“That leaves us room to reduce debt and also increase the dividend as we move on out, once the Nunavut platform is up and running”
Focus on executing expansions and exploring existing land holdings
“We’re not needing to buy something to fix a problem”
Clive Newall, First Quantum Minerals Ltd.
“Demand itself is very strong but supply isn’t. And so it looks like we’re in for a significant period of higher prices while there is a substantial deficit.”
Clive Newall
Photographer: Morten Andersen/Bloomberg
MARKET:
Copper likely to trade between $3 and $4 a pound long-term given shortfall between supply and demand
Electric-vehicle industry is a major driver for copper growth
Duration of bull market “depends on the speed with which the industry can respond”
SECTOR:
Focus of industry likely to remain on costs after lessons learned in downturn
Rising delivery costs for capital equipment may pressure some producers and presage brewing inflation
Sees few policy threats to industry
“Copper is a very international commodity and none of the major powers are over-endowed with it, so there’s unlikely to be any protectionism going forward”
Expects some miners will rebalance their asset portfolios
“Thermal coal is less appealing” compared with copper
COMPANY:
2018 is a “huge year” with ramp up of Cobre Panama
If copper prices stay strong, he expects to come under pressure from shareholders to keep building
“We certainly intend to be fairly conservative”
Need to reduce net debt, provide “a more appropriate competitive dividend” and still continue to grow
Will look for more internal and external opportunities to boost production
Says takeover interest in First Quantum possible given tightness of copper market
“Some companies would like a lot more copper production, so it’s inevitable that there is interest being shown, and particularly interest in Cobre Panama”
“We want to remain independent and continue to grow the company”
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