Barrick Gold Corp.’s sudden expansionist desires are driven by the same concerns as the rest of the industry — it’s getting harder to find gold and more expensive to mine it, according to John McCluskey chief executive of Alamos Gold Inc.
Barrick is pursuing a $17.8-billion hostile bid for its arch rival, Newmont Mining Corp., in a deal that would combine the two largest gold companies into a firm of unparalleled size.
If successful, it would have numerous consequences for the rest of the gold industry, potentially laying the groundwork for future asset sales and consolidation, and also potentially pulling new generalist investors into the high-risk, high-reward precious metals sector.
McCluskey said he thinks Barrick, and its new chief executive Mark Bristow, is concerned about the company’s gold reserves — meaning the amount of yellow metal left at its mines — and wants to increase its size so that it can comfortably sell off less-impressive mines without cutting down its profitability.
“They’re trying to essentially get enough critical mass so they can afford to divest what they know in their portfolio are non-core assets,” said McCluskey.
He added, “It doesn’t help Mark Bristow’s case when he describes those non-core assets as second-tier or garbage because then the companies he’s hoping will buy those, they have to turn around to their investors and explain why they want to buy garbage.”
Barrick, with $29 billion in market capitalization, is multiple times larger and in some ways a different beast than Alamos, which has $2.5 billion in market cap.
McCluskey, who once went salmon fishing with Bristow in British Columbia, says beneath the “gruff” persona, the Barrick CEO is actually a “teddy bear,” and a great mining executive.
Nonetheless, McCluskey believes Barrick faces two major “existential” questions like the rest of the wider industry: Where will its gold come from in the next decade or so, and and how will it deal with the rising costs?
Those two questions generated ample discussion throughout the Prospectors and Developers Association of Canada conference in downtown Toronto, which drew tens of thousands of mining investors and executives for several days before it ended on Wednesday.
On Sunday, Mike Ferguson, head of mining studies at S&P Global Intelligence, data about new gold discoveries suggests the industry has yet to recover from the great recession.
“Clearly the industry did very well in the 1990s and even through 2008,” said Ferguson said. “But since then there’s been a dearth of new big deposits (discovered), and … there is going to be a shortfall in new gold discoveries.”
In August, his company released a report, titled ‘Top Gold Producers Reserves in Decline,’ that looked at 20 major gold producers and found that as a group their remaining years of production based on reserves fell by on average five years over the last decade to 15 years, from 20.
In terms of costs, average amount of gold recovered per ton of ore mined, or the grade, has been declining since 2012 although it appears to be stabilizing, he said.
Barrick’s gold reserves declined from 64.4 million ounces at 1.55 grams of gold per ton, to 62.3 million ounces at 1.56 grams per ton at the end of last quarter. The company noted its reserves declined principally because of depletion at its Cortez Hills open pit “depletion” in Nevada and because of changes at its mine in Tanzania.
It did replace its gold resources, which could eventually become reserves, however.
On Tuesday, Bristow flew to New York to meet Newmont’s chief executive Gary Goldberg to discuss a joint venture in Nevada, where both operate major mine complexes.
Barrick’s Bristow has said he could find $4.7 billion in synergies in Nevada over the next two decades, and even large Newmont shareholders have said they believe a JV makes sense.
Newmont said in a statement that the initial meeting was productive, although its board has rejected Barrick’s hostile bid, and said it plans to move forward with its own $10-billion merger with Goldcorp Inc., expected to close in April.
McCluskey, of Alamos, said he thinks Barrick — which produced around 4.5 million ounces of gold last year, but has in the past produced as much as 8.6 million ounces of gold in a year — wants to merge with Newmont in part to increase its reserves.
“They’ll have long enough reserves to justify walking into a pension fund and saying you can invest in us and sleep softly at night, and everything is going to be fine,” he said. “I don’t think they feel that way now.”