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Are major gold-producing companies too big to fail? Mazumdar explored that question at last week’s Metals Investor Forum in Vancouver.

Are major gold-producing companies too big to fail? Not necessarily, Joe Mazumdar, economic geologist at Exploration Insights, said at the Metals Investor Forum in Vancouver last week. He emphasized that ultimately large gold producers will need to evolve in order to remain profitable.
In his presentation, Mazumdar focused on research he has done on eight North American gold producers and one Australian firm. They have a cumulative market cap of $85 to $90 billion, and together hold gold reserves of about 360 million ounces. In total, they produced 20 percent of the world’s gold in 2016, generating $30 billion in revenue.
Many investors find these large companies appealing, Mazumdar noted. And for good reason — he said that of the nine firms he looked at, most with market caps of over $10 billion beat the GDX benchmark by an average of 15 percent last year. That average was weighed down by Goldcorp’s (TSX:G,NYSE:GG) underperformance.


“The share price returns indicate that larger gold producers, those with big market caps over $10 billion, can still outperform their benchmarks. Meaning that they’re still alive and kicking. Endangered, but they’re still going,” he said.
Producers with market caps under $10 billion had a higher average outperformance of 23 percent thanks to IAMGOLD (TSX:IMG,NYSE:IAG); however, excluding IAMGOLD they underperformed by 9 percent overall.
A number of the nine gold producers Mazumdar looked at also had good average free cash flow yield last year. The average was 4 percent, and he said that Newcrest Mining(ASX:NCM), Newmont Mining (NYSE:NEM) and Barrick Gold (TSX:ABX,NYSE:ABX) are “still good value” because their free cash flow yields exceeded that average. Free cash flow allows companies to pay dividends, buy back shares and service their debt.
He considers Kinross Gold (TSX:K,NYSE:KGC) to be volatile as its investing activities have dropped its free cash flow yield into negative territory. Negative free cash flow drains a company’s working capital, forcing it to raise funds through divestments, debt or equity.
Mazumdar noted that while free cash flow is desirable, sometimes it comes at a price — for example, some of the companies he looked at increased their treasuries last year by divesting non-core assets and losing some of their reserves. “Investors appear to be alright with large gold producers’ reserves declining [in the near term] because they are looking more for the free cash flow generation from these companies,” he explained.
Even so, he suggested that reserves shouldn’t be ignored. The major gold producers he researched saw their reserve profiles experience a 4-percent year-on-year decline in 2016, and not all of them are prioritizing exploration spending. On average, the companies spent about 3 percent of their revenue, or $900 million, on exploration last year.

In some cases that’s not a big problem. For example, a few companies that are not spending a lot on exploration have fairly substantial reserve lives of 15 to 20 years. Yamana Gold (TSX:YRI:NYSE:AUY) and Newcrest Mining have significant porphyry copper-gold assets, he said.
But overall most of the miners Mazumdar looked at are spending money on near-mine or brownfields exploration. He stressed the need for more grassroots exploration moving forward.
“These low rates of exploration expenditure basically tell us that going forward there’s going to have to be an investment in exploration, but these companies seem more willing to do that investment in juniors. For these majors, in the end adaptation is the key to living in this volatile price environment.”
So what can investors expect to see from major gold miners moving forward? Mazumdar said they will likely start or continue to divest their non-core assets and evolve to maintain a smaller core of assets that generate double-digit returns at current or lower gold prices. And as that happens they will likely work with or invest in junior exploration companies doing grassroots exploration.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.

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