Shore Gold mentionBase metals shine for firms
JEFF BASSETTT/TORONTO STAR FILE PHOTO
A worker at Teck Cominco’s facility in Trail, B.C., inspects jumbo blocks of zinc awaiting shipment to producers of metal alloys. “We have lots of irons in the fire,” says Greg Waller, vice-president of investor relations, about the Vancouver-based miner’s diverse interests.
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Feb 20, 2007 04:30 AM
Lisa Wright
business reporter
When you think of Goldcorp Inc., Newmont Mining Corp. and Barrick Gold Corp., the first thing that comes to mind is, well, gold.
And big bullion miners want investors to keep thinking of them that way because they're typically traded at higher price-to-net-asset value multiples than their lowly base-metal cousins.
But take a closer look and you'll notice these once pure seniors are plugging their noses and heading into less familiar sidelines like black gold, zinc, silver and diamonds. In fact, many of the yellow-metal producers have taken on a rather reddish hue of late, thanks to the presence of construction and cabling-metal copper at their mines.
Amid a scarcity of new gold deposits out there, the gritty metals that large North American gold mining companies once sneered at are suddenly starting to look a lot prettier. Even though some base metals are off their highs, continued strong prices mean the bullion boys are finding they can't afford not to bring less glamorous, industrial-use resources into the fold.
"It's becoming a trend but we've been there for a while. We didn't set out to do it, but the bottom line is we have to create value and make money for our investors," says Sean Boyd, chief executive of Toronto-based Agnico-Eagle Mines Ltd.
The mid-tier gold producer has had such success mining silver, zinc and copper at its massive LaRonde gold site in Quebec that it's one of the lowest cost producers in the gold industry. Base-metal mining actually offsets the cost of extracting gold from the site.
And with the proposed friendly takeover of Vancouver's Cumberland Resources Ltd. announced last Wednesday, Agnico-Eagle will not only vault into the elite club that produces a million ounces or more of bullion each year, but it may also get into the light-bulb business. Cumberland's Jennings project on the B.C.-Yukon border hosts deposits of tungsten, used to make bulb filaments, along with molybdenum, or moly as it's known in the field, which is added to stainless steel to improve corrosion resistance.
Nearly half of Agnico-Eagle's bottom line is reliant on other metals and the company has taken some criticism for maintaining its higher gold multiple instead of being valued like a regular miner. But its explosive growth profile on the gold side is hard to ignore.
Agnico-Eagle is not the only bullion miner with fingers in other pies.
With the recent takeover of Glamis Gold Ltd., Goldcorp is set to develop a zinc, lead and silver mine in Mexico. It sold two mines in Australia and Brazil yesterday for $300 million (U.S.) to help fund future growth opportunities as miners rush to boost supply in the face of dwindling reserves.
Barrick's takeover last year of Placer Dome not only transformed Barrick into the world's top gold producer, but it also inherited the lucrative Zaldivar copper mine in Chile, as well. Copper sales now account for 20 per cent of overall sales and 26 per cent of the Toronto firm's gross profit.
And through its subsidiary Newmont Mining Canada, Denver-based gold giant Newmont has dabbled in everything from the Alberta oil sands and coal to Saskatchewan diamond exploration with Shore Gold Inc.
In fact, diversification is more the rule now than the exception in the mining world.
"The universe of miners is starting to look quite similar," jokes analyst Larry Smith of Blackmont Capital in Toronto.
In most cases it is a natural part of the mining game since copper is often found alongside gold at a typical deposit. Ditto with nickel deposits, where other base metals along with platinum and palladium mineralization tend to occur.
Add to that the fact that there are so few new gold finds out there that it's forced mining executives to look in other directions to expand their businesses and keep them viable into the future.
"Big, world-class deposits are very rare indeed, so we just take what nature gave us," says David Smith, Agnico-Eagle's vice-president of investor relations.
"The gold business is a tough business and it's a scarce resource, not like base metals," adds analyst Michael Fowler of Desjardins Securities.
"They're basically looking for cash. You don't just throw away the copper if it's there. Besides, Barrick gets more money out of Zaldivar than just about any of their other assets," he notes.
Analysts say the strategy works for gold producers in boom times like these, but could backfire whenever the base-metals market goes south.
Conversely, it's a strategy that could save a lot of base-metals miners once some of the steam comes off the high commodity prices. Gold is now enjoying a six-year rally and is trading at seven-month highs. It rose another $5.40 (U.S.) yesterday in London to close at $670.50 an ounce.
"It's risk mitigation. To support bigger market caps you have to have exposure to more commodities," says Smith.
In the current environment most miners are sitting on huge cash piles so they're literally looking under every rock to replenish the heap with promising prospects outside their core focus.
With everyone in the mining sector putting their eggs in more than one basket, you have to wonder: where have all the pure plays gone?
Smith prefers base-metal pure plays but notes there are few left in Canada, including Aur Resources Inc. and First Quantum Minerals Ltd. in copper, Breakwater Resources Ltd. in zinc and LionOre Mining International Ltd. in nickel, which is now Canada's biggest producer of the useful metal after the disappearance of Inco Ltd. and Falconbridge Ltd.
It wasn't long ago that when you wanted exposure to nickel, the two Canadian icons would spring to mind. Now Inco is married to Brazilian iron-ore behemoth CVRD and its former Toronto rival Falconbridge has been swallowed by Anglo-Swiss miner Xstrata PLC, a major league diversified mining group in its own right. As a result, they're no longer listed on the Toronto Stock Exchange.
Teck Cominco Ltd. has always stuck to the philosophy of diversification, even when pure plays were in favour. It lost the war over Inco, but it's still casting about for nickel along with oil, diamonds and iron ore.
"We have lots of irons in the fire," boasts Greg Waller, the Vancouver miner's vice-president of investor relations. And Teck Cominco's stock performance – along with $5.3 billion (Canadian) cash on hand – speak volumes as to how the strategy has succeeded.
"Over the long term, the financial performance has been better than the pure plays," Waller says. "Because of the diversification the company has more stable earnings and cash flow.
"The other benefit is that we can grow the business and invest in the best projects," he says, noting it is following the example of global giants Rio Tinto PLC and BHP Billiton.
Ironically, Teck is already juggling so much that it is looking to spin off its gold assets into a separate pure play.
"We don't really need the cash and we want to stay in the gold business," he explains. So don't be surprised if a company called Teck Cominco Gold pops up on the horizon.
Even Goldcorp founder and long-time gold bug Rob McEwen is on the hunt for oil and gas in Colorado through his junior company, Lexam Explorations. As usual he's going against the tide with a pure play in energy rather than just diversifying his other Toronto company, U.S. Gold Corp.
Higher risk means higher reward when it comes to junior explorers, McEwen argues.
"In the mining business, you come across other opportunities," adds Agnico-Eagle's Boyd. "There are fewer opportunities in gold and the big guys are under pressure because they can't grow their gold base."
But it's risky business in bullion to go too far beyond a certain limit in other metals.
"Gold companies usually aren't comfortable having more than 20 per cent of their assets in other metals. Then you start to get traded as a base-metals multiple," says Fowler.
Gold companies usually trade between two and three times their net asset value while regular base-metals diggers range from one to 1.5 times, depending on what they own.
As Boyd notes, being in base metals isn't such a far departure from bullion.
"It may not be your main business, but mining is mining and it's generally the same: it's breaking and moving rock and extracting the metal."
https://www.thestar.com/Business/article/183512