AUSTRALIAN INTERNATIONAL MINE MANAGEMENT CONFERENCE 22 AUGUST 2016
CAN THE GOLD INDUSTRY AVOID THE SINS OF THE PAST? NICK HOLLAND CEO GOLD FIELDS
MESSAGE OF THE PRESENTATION In 2012 I said that the industry needed to change the way it operated.
The fall in gold price forced a change in focus from growth to Free cash flow
Costs have been cut, unprofitable production closed, greenfields exploration slowed and new projects delayed
To come to our conclusions, we have analysed financial and operating trends between 2012 and 2015 of a sample of the largest global gold producers to form an industry proxy. COMPANIES INCLUDE:
Now, producers have to provide shareholders with a return on investment and leverage to the gold price
BUT, have we as an industry done enough? Are we losing focus with the recent recovery in gold price? WHERE TO FROM HERE? 1
MESSAGES FROM THE MELBOURNE MINING CLUB IN 2012
2
2012 MESSAGE
WHEN I PRESENTED AT THE MELBOURNE MINING CLUB IN 2012, I SAID THAT THE INDUSTRY WAS FAILING ITS SHAREHOLDERS IN KEY AREAS:
METRIC
Volume growth Margin expansion Capital optimisation
Balance sheet leverage Dividends
UP UNTIL 2012, THE INDUSTRY HAD FAILED TO OPTIMISE CAPITAL:
PASS/FAIL Capex/oz 10-year CAGR (to 2012) of 32%
M&A spend/oz 10year CAGR (to 2012) of 17%
BUT, production had declined slightly
Management teams were in the habit of overpromising and under delivering However, rhetoric among the producers was beginning to change in 2012: Cash is king, not growth
THE GOLD INDUSTRY WAS FAILING SHAREHOLDERS 3
PARTING THOUGHTS FROM 2012 CONCLUDING COMMENTS FROM 2012 It’s not about ounces for ounces’ sake. The focus had to shift from ounces in the ground and level of production to free cash flow
The Industry had to adopt an all encompassing cost measure
Mining companies needed to optimise their mining practices and capital allocation Management teams had to deliver on promises (production and cost guidance). No more overpromising and under delivering
Believe in the product: stay focused on gold
CHANGE WAS NECESSARY 4
WHAT HAS HAPPENED SINCE 2012?
5
MACROS TURNED… GOLD TANKED
GOLD PRICE 2 000
US$/oz
1 800 1 600 1 400 1 200 1 000
Nov-15
Jul-15
Sep-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Jan-13
Mar-13
Nov-12
Jul-12
Sep-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
Mar-11
May-11
Jan-11
800
Source: Bloomberg
GOLD EQUITIES LOST SIGNIFICANT VALUE 140
The gold equity indices fell on average 75% from the beginning of 2011 to their lows at the end of 2015
120 100 80 60 40 20
XAU
JSE gold index
ASX gold index
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
0 Jan-11
The gold price peaked at US$1,900/oz in September 2011 before falling to a low of US$1,050/oz in December 2015
TSX gold index
Source: Bloomberg, Indexed at 100 in January 2011
PRODUCERS WERE FORCED TO RESTRUCTURE 6
ETF HOLDINGS VS. GOLD PRICE Moz
Nov-15
Jul-15
Mar-15
May-15
Jan-15
Nov-14
Jul-14
Sep-14
Mar-14
May-14
Jan-14
Nov-13
Jul-13
Sep-13
Mar-13
May-13
Jan-13
Nov-12
Jul-12
2 000 1 800 1 600 1 400 1 200 1 000 800 600 400 200 0
Gold price
ASSETS UNDER MANAGEMENT OF GOLD FUNDS HAVE FALLEN SIGNIFICANTLY 150 100 50
First Eagle Gold Fund
Asa Gold & Precious Metals
Fidelity Select Gold Portfolio
Fidelity Advisor Gold
Franklin Gold & Prec Mtl
Tocqueville Gold Fund
Usgi Gld & Prec Metls
Usaa Precious Metals & Miner
Van Eck Intl Invest Gold
Nov-15
Sep-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Jan-12
Mar-12
Nov-11
Sep-11
Jul-11
Index (Jan 2011 = 100)
Jan-11
0
May-11
Combined AUM at the 9 biggest global gold funds fell from US$24bn at the beginning of 2011 to US$5bn at end-2015
Mar-11
ETF holdings peaked at 2,632 tonnes (85Moz) in 2013. At end-2015, total assets under management amounted to 1,467 tonnes (47Moz)
Sep-12
Mar-12
May-12
Jan-12
Jul-11
Sep-11
Mar-11
May-11
Jan-11
Nov-11
ETF holdings
Source: Bloomberg
Sep-15
US$/oz
90 80 70 60 50 40 30 20 10 0
Jul-15
INVESTORS FLED
Source: Bloomberg
CONFIDENCE IN THE SECTOR DECLINED
7
PRODUCTION GROWTH SLOWED
PRODUCTION FROM THE TOP 11 PRODUCERS 34 000
koz
32 000 30 000 28 000 26 000 24 000
22 000 20 000 2011 Source: Company Reports
2012
2013
2014
2015
5-YEAR PRODUCTION CAGR
Marginal increase in production from our sample of producers in the last 4 years (2011 to 2015)
Lower production from the blue chips has been replaced by growth from the mid tier producers
25% 20% 15% 10% 5% 0% -5%
Source: Company Reports Note: Gold Fields has been adjusted to account for spin off of Sibanye assets
Agnico
Randgold
Goldcorp
Sibanye
Polyus
Gold Fields
Kinross
Newmont
Newcrest
NO REAL GROWTH IN PRODUCTION
AngloGold
Barrick
-10%
8
BUT THE PRODUCERS REACTED
VAST IMPROVEMENT IN REPORTED COSTS
SIGNIFICANT REDUCTION IN CAPEX
• AISC 22% lower in 2015 than in 2012. Three year CAGR of – 8% • AIC 36% lower in 2015 than in 2012. Three year CAGR of –14%
• Both stay-in-business (SIB) and project capex
EXPLORATION SPEND HAS MORE THAN HALVED IN 2015 COMPARED TO 2012
BALANCE SHEET DELEVERAGING IS FIRMLY UNDERWAY
• US$36/oz in 2015 vs. US$78/oz in 2012
• Industry proxy of net debt/EBITDA of 1.45x in 2015, down from peak of 1.89x in 2014
CAPITAL DISCIPLINE HAS IMPROVED
9
REPORTED AISC AND AIC HAVE COME DOWN INDUSTRY AISC AND AIC TRENDS 1 600
In 2013, the World Gold Council introduced the All-in Sustaining Cost (AISC) measure to show all costs associated with producing an ounce of gold
US$/oz 1 490 1 395
1 400
1 200
1 115
1 087
1 067
959
949
1 000
873 800
600
On the face of it, the industry has done a great job in bringing costs under control
400
200
0 2012
2013
2014 AISC
2015
AIC
Source: Company Reports
Question: Is the lower cost base sustainable or has the industry gone too far?
THE INDUSTRY HAS DONE WELL IN CONTAINING COSTS, ON THE FACE OF IT
10
CURRENCIES AND OIL HAVE BEEN MAJOR TAILWINDS CURRENCIES ARE VOLATILE A$/US$ ; C$/US$
0,14
1,20
0,12
1,10
0,10
1,00 0,90
0,08
0,80
0,06 0,04
0,60
USD/ZAR (lhs)
AUD/USD (rhs)
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
0,40
Jul-12
0,00
May-12
0,50
Mar-12
0,02
Jan-12
50% - 60% OF PRODUCTION IS IN LOCAL CURRENCIES Since mid-2012, ZAR has depreciated by 47%, AUD by 26%, and CAD by 21% relative to the USD
0,70
US$/ZAR
CAD/USD (rhs)
Source: Bloomberg OIL HAS FALLEN SIGNIFICANTLY 140 120 100 80 60 40
US$/barrel
20
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
0
Jan-12
ON AVERAGE, DIESEL ACCOUNTS FOR 10% - 15% OF THE TOP PRODUCERS’ OPERATING COSTS Since mid-2012, the oil price has fallen by 55%
Source: Bloomberg
CURRENCIES AND OIL WILL NORMALISE AT SOME POINT
11
0,8
0,7
0,5
0,4 0,5
Source: Bloomberg
May-02
Oct-01
Mar-01
Aug-00
CURRENCIES DO NOT ONLY MOVE IN ONE DIRECTION
Jan-14 Aug-14 Mar-15 Oct-15 May-16
Mar-15 Oct-15 May-16
Jun-13 Jun-13 Jan-14
Nov-12 Nov-12
Aug-14
Apr-12
Jul-10 Jul-10
Apr-12
Dec-09 Dec-09
Feb-11
May-09 May-09
Sep-11
Oct-08 Oct-08
Feb-11
Mar-08 Mar-08
Sep-11
Jan-07 Aug-07
Jan-07
Jun-06 Jun-06 Aug-07
Apr-05 Nov-05
Apr-05 Nov-05
Feb-04
0,6
Sep-04
0,7
Feb-04
0,6
Sep-04
0,8
Jul-03
0,9
Jul-03
1,0
Dec-02
Source: Bloomberg
Dec-02
1,0
May-02
1,1
Oct-01
1,2 CAD/USD 1,1
Mar-01
0,9
Aug-00
AUD/USD
Jan-00
History shows that currencies are volatile and do not only move in one direction
Jan-00
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
HISTORY SHOWS THAT CURRENCIES REVERT ZAR/USD
18
16
14
12
10 8
6
4
Source: Bloomberg
12
CAPEX HAS FALLEN DRAMATICALLY
Capital expenditure has been one of the ‘low hanging fruits’ targeted by gold miners in their cost cutting drives
In the charts below, we illustrate the extremity of these cuts
Was the industry really that poor at allocating capital or have miners been cutting too much sustaining capex to lower AIC and preserve margins?
INDUSTRY CAPEX PER OUNCE PRODUCED
ABSOLUTE CAPEX OF INDUSTRY PROXY 25 000
Of concern is the notable decrease in Stay In Business (SIB) capex from US$305/oz in 2012 to US$160/oz in 2015
US$m
Project capex
SIB capex
400 350
20 000
US$/oz
US$/oz
359
700
311
305
300
600
235
250
15 000
500 180
200 10 000
150
300
121 75
50 2012 Source: Company Reports
2013
2014
2015
200 100
0
0
400
160
100
5 000
800
0
2012
2013 SIB capex (lhs) Source: Company Reports
2014 Project capex (lhs)
SIB CAPEX DECREASED FROM 46% OF OPEX IN 2012 TO 26% IN 2015
2015 Opex (rhs)
13
PRODUCTION GROWTH WAS PUT ON THE BACK BURNER • •
New projects have been deferred or cancelled due to an uptick in opposition from host communities and environmental authorities as well as financial constraints and failing to meet internal hurdle rates Possible outcome: JVs on new projects to spread the risk and lower the capital outlay
PROJECTS DELAYED/CANCELLED OVER THE PAST 5 YEARS PROJECT
COUNTRY
REASON FOR STOPPAGE/DELAY
RESERVES (MOZ)
PLANNED PEAK PRODUCTION (KOZ PA)
Conga
Peru
Stopped due to community opposition
6.1
300 - 350
Pascua Lama
Chile/Argentina
Stopped by environmental authorities
18.0
750 - 800
Cerro Casale
Chile
Delayed due to unfavourable economics
23.0
1000 - 1100
Obuasi
Ghana
Delayed due to restructuring and illegal mining
5.7
400
Rosia Montana
Romania
Stopped by environmental authorities
10.1
500
Pebble
USA
Delayed due to community opposition
37.0 (Resources)
na
La Colosa
Colombia
Delayed due to environmental issues
12.4
800 - 1000
Skouries
Greece
Delayed due to community opposition and environmental authorities
2.2
140 14
SO, WHAT IF WE NORMALISE FOR CURRENCY, OIL AND SIB CAPEX?
We have normalised for currency, oil and SIB capex by using the previous three-year average for currencies (CAD, AUD and ZAR) and oil, and assuming SIB capex of US$250/oz
Combined impact of these three variables on AISC: 2013: US$28/oz 2014: US$104/oz 2015: US$188/oz
Some capital has potentially been misallocated between sustaining capital and project capital. If taken into account, this could make the impact on AISC more pronounced
ADJUSTING AISC FOR CURRENCY, OIL AND SIB
IMPACT OF VARIABLES ON INDUSTRY AISC
US$/oz 1 115 1 200
90 1 115
1 067
1 094 949
1 000
1 061
1 053 873
80
85 US$/oz 65
70
60
60
800
50
600
42
40
400
30
200
31 23
20
0 Reported Adjusted 2012
Reported Adjusted 2013 Base
Source: Company Reports
Currency
Reported Adjusted 2014 Oil
Reported Adjusted 2015
10
2
7
2
0 2013
SIB
2014 Currency
Oil
2015 SIB
Source: Company Reports
HAVE COSTS REALLY DECLINED SUSTAINABLY?
15
WHAT DOES HISTORY TELL US ABOUT PERIODS OF CURRENCY WEAKNESS? PERIODS OF CURRENCY WEAKNESS HAVE HISTORICALLY LED TO INFLATION IN THE LOCAL ECONOMY
CHANGE IN ZAR VS. CPI 40%
0%
30% 4%
20% 10%
8%
0% 12%
-10% -20%
16%
-30%
A weaker trade-weighted ZAR leads to higher SA inflation. AUD weakness leads to and increase in Australian CPI
There is a lag of roughly 2 quarters for the impact to be felt
-40%
20% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Trade-weighted ZAR YoY%
S. Africa CPI YoY % (rhs, inverted)
Source: I-Net Bridge CHANGE IN AUD VS. CPI 30%
-1%
20%
1%
10% 3%
0% 5% -10% 7%
-20% -30%
9%
87
CURRENCY BENEFIT IS NOT FOR FREE
89
91
93
95
97
AUD/USD YoY%
99
01
03
05
07
09
11
13
Aus CPI YoY % (rhs, inverted)
Source: I-Net Bridge 16
COMPANIES HAVE BEEN SPENDING LESS ON EXPLORATION
Exploration budgets have been slashed
The bulk of exploration is focused on brownfields projects and near-mine development
TOTAL EXPLORATION 2 500
Greenfields exploration has all but dried up
If this continues, what does this mean for the industry in five years’ time?
TOTAL EXPLORATION / OZ
US$m
90
US$/oz
80 2 000
70 60
1 500
50 40
1 000 30 20
500
10 0
0 2012 Source: Company Reports
2013
2014
2015
2012
2013
2014
2015
Source: Company Reports
EXPLORATION SPEND WAS THE LOW HANGING FRUIT
17
AND NOT FOCUSING ON RESERVE REPLACEMENT
Gold companies have not been spending enough to replace reserves, never mind grow them
As a result of underspending and lower gold price, reserve life has fallen from 24 years in 2012 to 17 years in 2015
Acquisitions of in-production ounces is in vogue: to fill the impending production gap
RESERVES AND RESERVE LIFE 800
Years
Moz
25
700 20
600 500
15
400 10
300 200
5
100 0
0
2011
2012
2013 Reserves (lhs)
2014 Reserve life (lhs)
2015
Source: Company Reports
THE INDUSTRY NEEDS TO SPEND TO REPLACE RESERVES
18
APPARENT HIGH-GRADING HAS HELPED COSTS HEAD GRADE VS. RESERVE GRADE 2,50 g/t
US$/oz
2,00 1,50 1,00 0,50
WE HAVE CONSISTENTLY MINED ABOVE RESERVE GRADE OVER THE PAST FIVE YEARS
THIS GRADE INCREASE HAS FAVOURABLY IMPACTED AISC WHEN MEASURED IN US$/OZ
The difference between head grade and reserve grade increased in 2014 when the industry was mining almost 1g/t above reserve grade
Unit cost decreases are significantly lower when looked at in US$/tonne terms, particularly in 2014 and 2015
0,00 2011
2012
Difference Source: Company Reports
2013 Reserve grade
2014 Head grade
1800 1600 1400 1200 1000 800 600 400 200 0
2015 Gold price
YOY CHANGE IN AISC - US$/OZ VS. US$/T 0% -2% -4% -6%
-5,4%
-8%
-7,9%
-10% -12% 2013
COST SAVINGS AMPLIFIED BY HIGH-GRADING
2014 US$/oz
Source: Company Reports
2015
3-year CAGR
US$/t 19
FINANCIAL METRICS HAVE STARTED TO IMPROVE
As a result of cost saving initiatives and currency and oil tailwinds, there has been a reversal in Net cash flow and margins over the past two years
However, without a continued pick up in the gold price, we question the sustainability of this trend as gold companies now need to reinvest
NET CASH FLOW 8 000 US$m 6 000
How much of these cost savings are due to exogenous factors?
NET CASH FLOW MARGIN 15% 10%
4 000
5%
2 000 0
0%
-2 000 -5%
-4 000 -6 000
-10% 2012
2013
2014
Source: Company Reports Note: Net cash flow = Cash generated from operating activities – Total capex
2015
2012
2013
2014
2015
Source: Company Reports
COMPANIES HAVE FOCUSED ON CASH FLOW AND TRENDS HAVE IMPROVED
20
BALANCE SHEETS HAVE STRENGTHENED…
STARTING TO ADDRESS THE DEBT POSITION 35 US$bn
50%
30
40%
25
Balance sheets have strengthened but producers have been shielded by low interest rates
20
30%
15
20%
10 10%
5 0
The gold industry has been hindered by high levels of debt, with many producers turning to asset sales or equity raises as a means of addressing their indebtedness Recent equity raises: Gold Fields US$150m, Kinross US$300m, Franco Nevada US$920m, Silver Wheaton US$550m, Pretium US$150m, Independence Group US$188m, Centerra US$152m, IAM Gold US$200m
2012 Net debt (lhs)
2013 2014 Net debt/Equity (rhs)
Source: Company Reports
NET DEBT/EBITDA 1.89
2,0 Ratio 1,8
1.76
1,6
Recent asset sales: Bald Mountain & Round Mountain US$610m, Cripple Creek & Victor US$820m, Cowal gold mine US$550m, Porgera US$250m
0% 2015 Net debt/Mkt cap (rhs)
1.45
1,4 1,2 1,0
0.90
0,8
Only in the last 12 months have some of the producers applied free cash flow to reduce debt levels, albeit in small amounts
0,6 0,4 0,2 0,0 2012
2013
2014
2015
Source: Company Reports
…BUT INTEREST RATES WILL EVENTUALLY RISE 21
HAVE SHAREHOLDERS BENEFITED FROM IMPROVED CAPITAL DISCIPLINE?
Gold companies have historically used script to fund acquisitions or growth projects • Production/share three year CAGR: -1,3% • EBITDA/share three year CAGR: -15,4%
SHARES IN ISSUE VS. PRODUCTION 9 000
EBITDA AND NET CASH FLOW PER SHARE
grams/share
Shares (m)
0,109
8 750
0,108
8 500
0,107
8 250
0,106
8 000
0,105
7 750
0,104
7 500
0,103 2012
2013 Shares
Source: Company Reports
2014
2015
Gold companies need to start focusing on per share metrics to measure performance
3,50
US$/share
US$/oz
1800
3,00
1600
2,50
1400
2,00
1200
1,50
1000
1,00
800
0,50
600
0,00
400
-0,50
200
-1,00
0 2012
2013 EBITDA/share
Production (g/share)
2014 Net CF/share
2015 Gold (rhs)
Source: Company Reports
EQUITY IS NOT FOR FREE
22
THE GOLD SECTOR HAS BEEN A POOR DIVIDEND PAYER DIVIDEND YIELDS HAVE BEEN UNATTRACTIVE
3 500 US$m
Gold producers have been notoriously poor dividend payers
2,00%
1,75%
3 000
1,50% 2 500 1,25% 2 000
Dividends have generally been linked to earnings and as such have been insignificant. Do gold companies have to start rethinking dividend policies to make dividends more meaningful?
1,00% 1 500 0,75% 1 000 0,50% 500
0,25%
0
Gold companies that have paid higher dividend yields have been rewarded through equity performance
0,00% 2011
2012
2013
Dividend amount
2014
2015
Dividend Yield
Source: Company Reports
DIVIDEND PAYOUTS NEED TO BE REVIEWED
23
REVISITING THE PARTING THOUGHTS CONCLUDING COMMENTS FROM 2012
PASS/FAIL
It’s not about ounces for ounces’ sake. The focus had to shift from ounces in the ground and level of production to free cash flow The Industry had to adopt an all encompassing cost measure Mining companies needed to optimise their mining practices and capital allocation Management teams had to deliver on promises (production and cost guidance). No more overpromising and under delivering Believe in the product: stay focussed on gold
THE INDUSTRY HAS REACTED 24
WHERE TO FROM HERE?
25
2016 YEAR TO DATE GOLD HAS HAD ITS STRONGEST YEAR IN DECADES, UP 25% YEAR TO DATE GOLD EQUITY INDICES HAVE RISEN BY OVER 100% ON AVERAGE SINCE THE BEGINNING OF 2016 GOLD EQUITIES HAVE RECOUPED SOME LOSSES
THE GOLD PRICE RECOVERY HAS BEEN UNEXPECTED
300 1 400 250
1 300
200
1 200
150
Source: Bloomberg
XAU Source: Bloomberg
JSE gold index
ASX gold index
Jul-16
Jun-16
May-16
Apr-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Jan-15
Jul-16
Jun-16
May-16
Apr-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
0
May-15
800
Apr-15
50
Mar-15
900
Feb-15
100
Jan-15
1 000
Mar-15
US$/oz
Feb-15
1 100
TSX gold index
A PERIOD OF RECOVERY 26
ETFs AND ASSETS UNDER MANAGEMENT HAVE FOLLOWED SINCE THE BEGINNING OF 2016, ETF HOLDINGS HAVE INCREASED BY 545 TONNES (17.5MOZ) TO 2005 TONNES (64.5MOZ) COMBINED AUM AT THE 9 BIGGEST GLOBAL GOLD FUNDS HAVE INCREASED BY US$8.2BN YEAR TO DATE STEADY INFLOWS INTO ETFS US$/oz
Moz
70 65
ASSETS UNDER MANAGEMENT OF GOLD FUNDS ARE RISING 1 600
200
1 400
60 1 200
55 50
1 000
45
150
100
800
40
50 600
ETF holdings Source: Bloomberg
Gold price
First Eagle Gold Fund
Asa Gold & Precious Metals
Fidelity Select Gold Portfolio
Fidelity Advisor Gold
Franklin Gold & Prec Mtl
Tocqueville Gold Fund
Usgi Gld & Prec Metls
Usaa Precious Metals & Miner
Jun-16
May-16
Apr-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
0
Feb-15
Jul-16
Jun-16
May-16
Apr-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
400
Jan-15
30
Jan-15
35
Van Eck Intl Invest Gold Source: Bloomberg
INVESTMENT HAS RETURNED
27
THE EUPHORIA IS BACK The rise in gold price in 2016 has resulted in a step up in capital raisings and M&A activity: US$2.9bn in Equity Capital Market (ECM) deals year to date
Some of the bigger ECM deals in 2016 include: Gold Fields US$150m, Kinross US$288m, Franco Nevada US$920m, Silver Wheaton US$550m, IAM Gold US$200m, Independence Group US$188m US$2.5bn of M&A activity year to date Asset/company purchases in 2016: Bald Mountain & Round Mountain US$610m, True Gold mining US$180m, Amara Mining US$116m, Lake Shore Gold Corp US$547m, Claude Resources US$240m, Kaminak US$405m, Goldrock US$102m, Porgera US$250m Barrick has noted its intention to sell its 50% stake in KGHM
OLD HABITS DIE HARD 28
IT’S BACK TO GROWTH! ● “New approach needed to prevent gold miners’ sins of the past” Miningweekly.com, 10 June 2016 ● “Australia halfway down the mining investment cliff – National Australia Bank” Miningweekly.com, 13 June 2016 ● “Australia exploration spend falls for eighth straight quarter” Miningweekly.com, 3 June 2016 ● “Australian gold output slips 2% as miners dig lower grade ore” Reuters.com, 29 May 2016 ● “Risks mount for gold producers over deep capex cuts” Mining.com, 19 May 2016 ● “Miners cut distressed debt pool by $60bn as rebound firms” Miningweekly.com, 13 June 2016 ● “Gold firms gear up for growth as cost of mining the metal falls” Mining.com 8 June, 2016 ● “Gold miners talk about expanding after years of cost cutting monologues” BDlive.co.za, 8 June 2016 ● “Gold miners set to relax death grip on spending as caution eases” Miningweekly.com, 19 July 2016 29
FUNDAMENTALS ARE SUPPORTIVE
GOLD STILL AN IMPORTANT ASSET CLASS 2000 1800
0,9% US$bn
0,8%
1600
0,7%
1400
0,6%
1200
0,5%
1000
0,4%
800
0,3%
600
Gold remains an important asset class • US$1.5tn in value in 2015; peaked at US$2.0tn in 2012
Growth in primary supply is constrained • The rate of growth in global supply has slowed to 1.5% in 2015 from 7.5% in 2009
400
0,2%
200
0,1%
0
0,0% 2006
2007
2008
2009
2010
2011
Total value
2012
2013
2014
2015
% of total assets
Source: The CPM Gold Yearbook 2016 MINE SUPPLY
YOY PRODUCTION GROWTH
16
Moz
Moz
14
8,0%
120 100
12 6,0%
80
10 8
4,0%
60
6 2,0%
40
4 20
2
0,0%
0
0 2006
-2,0% -4,0% 2007
2008
2009
Source: The CPM Gold Yearbook 2016
2010
2011
2012
2013
2014
2015
2007
2008
2009
2010
2011
2012
2013
2014
2015
Total (rhs)
South Africa
USA
Australia
Canada
Ghana
Peru
Mexico
Indonesia
Rusia
China
Source: The CPM Gold Yearbook 2016
30
FUNDAMENTALS ARE SUPPORTIVE
JEWELLERY, BARS & COINS DEMAND 100% 80% 60% 40% 20%
Demand • ETFs: Outflows have started to reverse since significant drop that began mid-2013 • Central bank buying: EM banks have been increasing reserves • Physical buying: China and India continue to drive demand
Gold price expectations • Consensus estimate: US$1,306/oz • Futures prices on Bloomberg: US$1,343/oz
0%
2006
2007
2008
2009
India Source: World Gold Council
2010
2011
China
2012
2013
2014
Rest of World
CENTRAL BANK HOLDINGS Tonnes
60 Tonnes
1 060 1 040
50 QUARTERLY ETF FLOWS 400
2015
1 020
40
Tonnes
1 000
300
30
200
20
980
100
960
10
940
0 0
-100
920 2006
-200 1Q14 2Q14 3Q14 Source: World Gold Council
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
2007
2008
2009
World (rhs)
2010
2011
2012
China (Ihs)
2013
2014
2015
Russia (Ihs)
Source: The CPM Gold Yearbook 2016
IN THE LONG RUN, SUPPLY/DEMAND MUST PLAY A KEY INFLUENCE IN DETERMINING THE GOLD PRICE
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WHAT DO INVESTORS WANT? What are key attributes for you to invest in a gold company?
● Focus on per share metrics. Companies need to grow value without diluting shareholders ● Risk management, capital allocation and operational delivery are important
Is growth in production important? ● Yes, if it results in increased value, otherwise no point ● Secondary to profitability What is the optimal capital structure for a gold company? ● There isn’t necessarily an ideal capital structure ● BUT the less debt the better Are dividends important? ● Views are split ● Some investors feel dividends are essential while others say they should only be paid if there aren’t better uses of the capital 32
WHAT DO INVESTORS WANT? (CONTINUED) Have gold companies been underspending capex? ● Gold companies have been poor at allocating capital ● There is a suspicion that companies might have been spending too little sustaining capex in recent years What is the optimal size of a gold company? ● There is not necessarily an optimal size but gold companies can get too big ● Consensus view on a good size: 2.0Moz – 2.5Moz with 6 – 10 mines spread across a manageable number of jurisdictions in low to medium risk geographies
Are non-financial/ESG issues important when investing in a gold company? ● Yes! And they are getting more so Should gold companies have assets in different stages of the production chain (greenfields, in development, in production)? ● Definitely! Companies have to regenerate and replace maturing mines ● Business should be diversified to operate in different point of the cycle 33
PARTING THOUGHTS ● Gold producers need to embrace innovation and technology ̵ Grades are decreasing, mining depths are increasing and mineralogy is becoming more complex ̵ Gold miners will need to get good at mining lower grade, more complex orebodies profitably ● Collaboration and the use of Joint Ventures will increase ̵ Big bang acquisitions will be less common. Producers will look to spread risk and cost (hedge bets) ● Exploration will increase, there is no choice ̵ Greenfields will return. Is the junior exploration industry the best hunting ground for the majors to get greenfields back into their portfolios?
34
PARTING THOUGHTS (CONTINUED)
● Assuming long-term estimates hold true, the gold industry will contract ̵ We have made changes in response to the fall in price but have been helped by currency weakness and a falling oil price ● Has the gold price recovery come too soon? Does there still need to be some cleansing? ● Key Question: What happens if the gold price continues to recover? ̵ Has the industry learnt from past mistakes (chasing ounces, reducing cut-off grades) or will it go back to its old ways of spending all cash flow to grow production ● Why do investors want to invest in gold companies: ̵ Margin expansion with a rising gold price ̵ Growth in free cash flow
̵ Optionality for investors looking for beta on top of cash flow
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AUSTRALIAN INTERNATIONAL MINE MANAGEMENT CONFERENCE 22AUGUST 2016
CAN THE GOLD INDUSTRY AVOID THE SINS OF THE PAST? NICK HOLLAND CEO GOLD FIELDS INVESTOR RELATIONS CONTACTS Avishkar Nagaser Tel: +27 11 562 9775 Mobile: +27 82 312 8692 E-mail:
[email protected]
MEDIA RELATIONS CONTACT Thomas Mengel Tel: +27 11 562 9849 Mobile: +27 82 315 2832 E-mail:
[email protected]
Sven Lunsche Tel: +27 11 562 9763 Mobile: +27 83 260 9279 E-mail:
[email protected]