Home and away, gold majors' performance questioned

Agnico Eagle Mines has grown to become the third largest Western gold producer by market capitalisation, with a strategy built around its historical homeland in Quebec, Canada. While the operations of its competitors are more widely spread worldwide, Agnico has comparatively only given its wings a modest flap and is arguably reaping the dividends of that.

The epoch since 2019 has been characterised by gold sector-defining mergers and acquisitions, with the three biggest gold companies making purchases. However, over this time frame, the gold sector has gone from having two clear leaders to just one or three, depending on how tightly you read the data.

In 2019, Newmont and Barrick were about $35 billion companies by market capitalization, with Agnico a distant third at $15 billion. Following its merger with Newcrest Mining in 2023, Newmont is a $48 billion company with clear daylight to Barrick, whose market capitalisation has stagnated, allowing Agnico almost to catch it and close within $5 billion.

Agnico has grown its reserves from 24Moz in 2020 to 54Moz in 2023, while its production has grown from 1.6Moz in 2018 to 3.4Moz in 2023. Its geographical concentration has been reflected in its purchases, most notably acquiring half of the Canadian Malartic mine in Quebec it didn't own from Yamana Gold in 2023. The company had a fantastic 2023 with record production, operating cash flow, record reserves and its best safety year ever.

"One of the reasons Agnico has been consistent is because of our regional approach. While many of our peers who are very good, they are global miners. They go into difficult places and that's a tough business. Agnico has been in the Abitibi for 60 plus years. We know the ground better, the people better, the suppliers better, the contractors better, and that allows us to have less volatility and more certainty when we're operating our business," Agnico Eagle Mines chief executive Ammar al-Joundi told Mining Journal.

Newmont's market capitalisation has more than doubled from $18.5 billion since the end of 2018, when it bought Goldcorp and, more recently, Newcrest. Its market cap peaked in April 2022 at $67.2B and has halved since then despite bringing in Newcrest and the gold price hitting a record of more than $2100/oz.

Newmont has grown its production from 5.1Moz in 2018 to 6.4Moz in 2023 and is guiding that it will grow to more than 8Mozpa of gold equivalent, which it believes will be a sustainable level for several years. Newmont has seen its reserves grow from 96.1Moz at the end of 2022 to 135.9Moz at the end of 2023 with the Newcrest acquisition, although that will fall following the divestment of six assets, including four operating mines, that Newmont announced in February.

Benefitting from a regional cluster was at the heart of Newmont's Newcrest transaction, with a multi-asset portfolio of mines and development projects in British Columbia, including greater exposure to copper.

Barrick has not undertaken a major transaction since its 2019 merger with Randgold Resources, with chief executive Mark Bristow preferring to grow organically via exploration. This approach is a slow burner to value creation and has successfully grown the company's gold reserves from 71Moz in 2019 to 77Moz in 2023.

Barrick is now more than replacing its annual depletion, although the caveat is that its annual gold production has declined from a high of 8.6Moz in 2006 to just over 4Moz in 2023, or broadening this to gold equivalent, from 10.5Moz to 4.9Moz.

"One of the biggest challenges to this industry is to maintain your production level and then grow. To maintain your production level, you've got to find more. For a company like B2Gold, at 1Mozpa we will continue to grow because there could be smaller companies where we land on our feet. There's certainly a certain point of time when it's going to be tough. It's a hell of a challenge to replace 5-8Mozpa [of production]. It's doable, but it's really challenging," B2Gold chief executive Clive Johnson told Mining Journal.

"I praise companies like Agnico, because they haven't focused on mines outside of North America … and that pays dividends because it's a simpler business. If you're spread all over the world, from Africa to Australia to North America to Latin America, the wear and tear on management as you travel around and do what you [is considerable]," Artemis Gold chief executive Steven Dean told Mining Journal.

AISC

There is a certain disbelief among gold equities and their investors at the divergence between record gold prices and the continued underperformance of stocks. This divergence is partially explained by the ability of gold companies to make money, as indicated by its annual all-in-sustaining cost (AISC). Once again, Agnico is the standout, suggesting that running a business with a narrower geographical spread is less costly.

Each company began the period with an AISC of less than $1000/oz. Inflationary pressures hit each company to a similar extent in the 2020-2022 period, but while it continues to have an impact at Newmont and Barrick, Agnico has done a better job of getting it under control, with each ounce costing it roughly $200-300 less to produce than those of its rivals. Agnico expects its AISC to drop back to levels closer to $1000/oz as it increases its production to 8Mozpa, from the $1444/oz achieved in 2023.

"There is a negative sentiment around the market today because the gold price is so strong, and the gold equities haven't performed," said Johnson.

"A lot of the tier one assets sitting inside the senior producers are old assets. They've been operating in some cases 20, 30, 40 years. It is harder to operate an older mine in the lower quartile of AISC because the plants are older, there's more maintenance, there's more sustaining costs. If it's an open pit, it's getting deeper, so the haul distances are getting longer. If it's an underground mine, the shafts and underground development are getting deeper, which add to the costs of those tier one assets," said Dean.

Too big to succeed

While gold companies have sought growth to attain a scale attractive to generalist investors, the evidence suggests that, so far, the mega deals have not created value and may have created companies too big to succeed, given the inherent challenges of managing multiple mines across multiple jurisdictions. The failure of Newmont and Barrick to deliver outperformance could be turning investors off the sector. If the gold sector leaders of the two companies cannot deliver outsized performance, why would generalist investors look at the sector?

"The need to get bigger is real. They are getting bigger because they want their companies to be more meaningful, with a larger market cap and higher liquidity, so they're more appealing to larger institutions. … We often run into institutional investors that tell us they are not allowed to buy companies below $5 billion market cap, which excludes a lot of the [gold mining] universe. It is a challenge to stay relevant in a world increasingly focused on liquidity and size," John Ciampaglia, chief executive of Sprott Asset Management told Mining Journal.

The pursuit of tier one assets with production scale and a long life run time is a foundation stone of large miners being able to give 10-year production and cost guidance. Newmont is winnowing its asset portfolio to focus on such assets, which it believes should help drive its costs down.

"Companies are looking to divest assets to simplify their portfolios and see if they can create synergies and sell assets that don't fit and take too much management time. Companies are asking, if someone else would be better at operating it, and the answer can be yes. Focusing on a core, whether it be regional or country-specific portfolios, is probably a better thing to do," Colin Hamilton, mining analyst at BMO Capital Markets, told Mining Journal.