Eldorado Gold Corp. on Thursday cancelled plans to build a $500-million processing mill in Turkey and investors took note, sending the stock soaring 28 per cent Friday morning after watching it decline for the past year.
A similar trading pattern occurred on Iamgold Inc.’s stock last week, which rose more than 20 per cent after the miner indefinitely delayed construction of its nearly $1-billion Côté mine in Ontario.
Taken together, the two companies’ decisions may offer a picture of what investors want from mid-tier gold companies, particularly those suffering through years-long slumps: fewer projects with hefty price tags as analysts across the board predict greater consolidation in the precious metals sector.
“The way I would describe it is, if you look at our sector, there was a period of time when growth was being rewarded,” said George Burns, chief executive of Eldorado Gold. “That’s changed pretty significantly. The market today does have a preference for cash flows and short-term returns.”
Cancelling the Kisladag gold mill in Turkey may not have been entirely voluntarily, since Eldorado Gold has approximately $600 million in debt due in 2020, is building a mine in Quebec and had just $293 million in cash on its balance sheet at the end of 2018.
Cosmos Chiu, a CIBC World Markets Corp. analyst, said in a note that Eldorado Gold would have encountered difficulty obtaining financing to build its mill. Despite the investor cheers, Chiu downgraded the company, noting, among other factors, it is unlikely to fetch a premium price if it decides to sell any assets.
ButBMO Capital Marketsanalyst Andrew Kaip upgraded Eldorado, predicting it is now in a position to retire its debt.
Some companies may also be able to revive high-priced projects that are too difficult to finance in the current environment if the price of gold substantially rises, said Michael Siperco, an analyst at Macquarie Research.
Of course, investors still want to see growth, even though it is difficult to raise financing for organic growth in a sector that Siperco and his fellow analysts at Macquarie Research described as fundamentally unhealthy in a 14-page report called Merger Mania is Here.
“In 2010, at the peak of the previous cycle with gold close to all-time highs, there were 27 producers with a market cap over $1 billion,” according to Siperco. Today, there are 35 producers of that size, which means increased competition for investment.
The competition is further exacerbated by the rise of streaming companies and exchange-traded funds, which increasingly attract more generalist investors because they’re less risky and more diversified than owning a single mining company.
Streaming companies and ETFs now account for 25 per cent of the investment dollars in precious metals, Siperco noted, compared to a negligible amount a decade ago.
A third pressure point on mid-tier producers is the concentration at the top of the sector. The recent Barrick Gold Corp.-Randgold Resources and the proposed Newmont Mining Corp.-Goldcorp Inc. mergers will create two senior producers far larger than any of their peers.
In 2015, the market cap of the top two producers together was half the size of the next five largest combined, whereas the top two producers could soon have a slightly larger market cap than the total of next five producers (assuming the Newmont-Goldcorp merger is consummated), according to Siperco.
The Macquarie report notes larger companies can more easily absorb weaker, smaller mining companies, meaning “consolidation should be coming, and should help fix a fragmented sector.”