Gold Giants Shrink to Fit as Call For Breakup Grows

March 22, 2013 at 10:15


The 10 biggest gold companies led by Barrick Gold spent more than $100 billion in the past 20 years buying new mines and projects around the globe. Now they’re feeling pressure to throw the strategy into reverse. Gold Fields spun off most of its South African assets in February.

Billionaire hedge-fund investor John Paulson is calling for a breakup of Johannesburg-based AngloGold Ashanti. Barrick, which has 27 mines, is selling assets after an acquisition and cost overruns helped erase $27 billion of the Canadian company’s market value.

A Bloomberg Index of 14 large gold miners has lost 27% in the past year, worse than the 7.2% drop in a similar gauge of global oil companies. The gold industry, which underperformed the metal for five of the last seven years, has tried to stop the slide by ending goldprice hedges, raising dividends, building new mines and, most recently , pledging spending discipline.

Spinning off or selling assets may be its next option. “The next fad is going to be the unbundling of the majors,” said Mark Bristow, chief executive officer of Randgold Resources. The Jersey, Channel Islands-based company believes the optimal number of mines is “four or five, six at a push,” he said. Such moves would follow the example of international oil companies that have split up to unlock value.

ConocoPhillips, the largest independent US oil and natural gas producer, spun off its refining unit in May, less than a year after Houston- based Marathon Oil listed its refinery network as a separate company. Shareholders have grown cold on further expansion as valuations in the industry declined. The ratio of the largest gold miners’ enterprise value to their earnings before interest, tax, depreciation and amortisation dropped to 6.3, less than half the multiple at the end of 2010, data compiled by Bloomberg show.

The gold-mining strategy of bulking up was led by Barrick, which became the industry leader in 2006 when it bought Placer Dome for $10.2 billion. Now operating across four continents, Barrick saw the estimated cost of its Pascua-Lama mine on the Argentina-Chile border more than double to as much as $8.5 billion and it took a $3 billion writedown on a Zambian copper mine last month.

“It’s like herding cats to manage something like that,” said George Topping, a Torontobased analyst at Stifel Nicolaus & Co. “It’s very difficult across all those different time zones, different cultures, tax regimes, politics .” Investors, weary of operational setbacks and soured takeovers, have turned to gold-backed exchange-traded products that track the price of the metal.

SPDR Gold Trust, the largest gold ETP, has lost 3% in the past year, a smaller decline than gold equities. The S&P 500 rose 11% and the gold price dropped 2.4% in the period. Gold equities are now trading at a discount to the broader stock market.

“The mining industry has lost a lot of appeal, of interest, because of poor guidance, poor delivery, over- promising, cost overruns,” said Gerald Panneton, a former Barrick executive who is the CEO of Detour Gold, the operator of one mine in Ontario. The global gold-miner “is not a model that is sustainable,” he said in a March 5 interview.

To win back investors, Barrick and competitors including Newmont Mining, the second-biggest producer by sales, are promising they’ll focus on margins and containing soaring costs, rather than boosting output. Returns will drive production, rather than the other way around, Barrick CEO Jamie Sokalsky said on February 25. Barrick says it will defer, shelve or sell assets that don’t meet his requirements for returns and cash flow.

“Our overriding objective is to translate the company’s strengths into higher shareholder returns and we’ll always consider opportunities to advance that objective,” said Andy Lloyd, a Barrick spokesman. Breaking up the biggest gold producers could result in higher valuations for the parts compared with the whole, according to Stifel Nicolaus’s Topping. It would also make it easier for companies to expand output and replenish reserves, said Jorge Beristain, an analyst at Deutsche Bank in Stamford, Connecticut.