Ian McGugan
The three-cornered deal announced on Tuesday by Barrick Gold Corp., Goldcorp Inc. and Kinross Gold Corp. is better than the market thinks it is.
While investors' reaction was immediately and uniformly negative – Goldcorp stock plummeted and Barrick and Kinross shares both lost ground – the shuffle of assets seems like an eminently sensible transaction.
The agreement, which centres on the Cerro Casale gold and copper project in northern Chile, gives each of the companies something it values highly: cash for Kinross, new reserve potential for Goldcorp and a low-cost way to move forward a shelved project for Barrick.
It also allows Goldcorp and Barrick to share the risk of developing a swath of Chile's Maricunga gold belt, while letting the two companies spread expenses among a number of nearby projects.
In short, it's an incremental, guarded path to development that stands in contrast to the roll-the-dice strategy that was common during the commodity frenzy of a decade ago. It signals that major gold producers are edging back into expansion mode but are hedging their bets while doing so.
Both the ambitious scope of the deal and its relative caution speak to an environment in which it's becoming tougher and more expensive to find new mines of all types. Richard Schodde, managing director of MinEx Consulting in Australia, estimates the mining industry's cost per discovery has tripled in inflation-adjusted terms over the past decade.
He figures that every dollar spent on exploring for gold deposits between 2007 and 2016 resulted in only 46 cents of discoveries. A similar trend holds true for other metals. "Over the last decade the exploration industry has moved from creating wealth to destroying wealth," he says.
In response, cash-strapped miners have cut back on exploration expenses, leading to a dearth of new discoveries. If you assume that demand for gold will grow in line with the world economy, the relative lack of exploration success suggests there will be persistent upward pressure on gold prices in years ahead.
To be sure, many factors could derail that forecast, but the increasing cost of finding new mines should help support current gold prices. That bodes well for companies that can beat the odds and get a decent payback on exploration.
The deal announced on Tuesday suggests the industry is eager to return to developing promising projects – especially if it can find ways to mitigate the risk. The transaction involves numerous steps but the heart of it is a bold bet by Goldcorp on the potential of Chile's Maricunga gold belt and particularly the Cerro Casale project.
Until Tuesday, Kinross had owned 25 per cent of Cerro Casale while Barrick controlled the remainder. In a flurry of deals, Goldcorp is buying out Kinross's stake for $260-million in cash as well as future considerations.
Goldcorp is also acquiring a further 25 per cent of Cerro Casale previously held by Barrick in exchange for agreeing to spend $260-million on the project as well as several other commitments.
As part of its deal with Kinross, Goldcorp gets the Quebrada Seca exploration project. In a separate transaction, Goldcorp will pay $185-million in shares for Exeter Resource Corp., an independent company that owns the Caspiche project, also located in the Maricunga gold belt.
Both Quebrada Seca and Caspiche will then be contributed to a joint venture between Barrick and Goldcorp.
The result of all this buying and selling will be a 50/50 partnership between Canada's two largest miners to develop Cerro Casale, Caspiche and Quebrada Seca. The idea is that by spreading capital and operating costs among several nearby projects, Barrack and Goldcorp can increase potential returns.
It will be several years before anyone can say whether the venture will be as profitable as its designers hope, but the structure of the transaction and its pricing seem reasonable.
Goldcorp is taking the biggest gamble, but given its stated intention to grow its reserves by 20 per cent, it was in the market for a big deal. Cerro Casale fits the bill: It is generally regarded as one of the world's largest undeveloped gold projects.
The upshot of all this? Investors with an appetite for gold and a stomach for risk should look at today's slump in Goldcorp shares as a buying opportunity.
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Ian McGugan