No easy ride for world's top 10 gold miners

Author: Lawrence Williams
Posted: Tuesday , 02 Oct 2012 

LONDON (MINEWEB) - 

Nobody ever said mining was easy - all kinds of things can, and probably will, go wrong with an operating mine. And the world's top 10 gold miners, despite their years of mine-building expertise, are no exception, with most of them experiencing significant difficulties with one aspect or another of their operations over the past year or so.  Indeed they have, as a group, come in for a significant amount of flak over their poor stock price performances vis a vis the gold price.  In part this is because of a perception that ever rising production costs are eating into the profit potential generated by high gold prices, but, in truth, most of them have seen other factors coming into play which have also led to sometimes significant underperformance against the metal price - and even against their own past growth patterns.

But how does one categorise the top 10 gold miners?  A common practice is to define them by market capitalisation - see Table 1. below, but this creates some anomalies in the pecking order - notably with companies which produce significant quantities of other metals or minerals. Most, in fact, do so either through co- or by-products which are very significant in some cases.  Indeed in our listing by market capitalisation we have included Freeport McMoran in second place (a year ago it would have been top on the basis of the tabulation) which is actually primarily a copper miner, but, as can be seen in Table 2, which lists the major miners by annual gold output, it still classifies as one of the world's top gold producers under any categorisation so has been included nonetheless. In fact, of the global top 10 there are virtually none which could nowadays be classified as a 'pure' gold miner, except perhaps Randgold Resources which has come into the top 10 by market cap through a great growth performance and development pipeline, although remains well out of the listing of top gold miners by gold output.

If one goes through the individual companies in the listings one comes up with a chapter of problems for virtually all - from delayed new project developments (Barrick Gold), major labour disputes/difficulties - Freeport, AngloGold, Gold Fields (which has slipped out of the top 10 by market capitalisation but ranks fourth by mine output), Existing project expansion setbacks (Goldcorp, Newcrest), Geopolitical difficulties (Newmont), Significant underperformance of major strategic asset (Kinross).  Indeed the perceived problems are such that so far two CEO heads have rolled (Barrick Gold and Kinross) and there are rumours that others may yet follow.

Table 1: Top 10 Gold Mining Companies by Market Capitalisation
Rank 2012	Company	Market Cap ($billion)
1	Barrick Gold	41.10
2	Freeport-McMoRan	37.57
3	Goldcorp	36.56
4	Newmont Mining	27.79
5	Newcrest Mining	22.28
6	Yamana Gold	14.27
7	Anglogold Ashanti	13.44
8	Kinross Gold	11.46
9	Randgold Resources	11.30
10	Eldorado Gold	10.87

The bigger the producer, the more pressure there is to develop new output just to maintain production, let alone to expand it, which has been the past pattern.  With production from older mines declining through falling grades and/or ore reserve depletion, the pressure for replacement is enormous which means that deposits which would not have been seen as targets, due to grade or location, only a few years ago, are now being brought to production, so it's not surprising there are more problems coming to the fore.  Developing a mega-deposit - like Barrick's Pascua Lama for example - creates a host of development and logistical problems that have to be worked through.

These problems of output maintenance through greenfield expansions in more hostile geographical, and sometimes political, environments are at last gaining recognition and it was noticeable that at this year's Denver Gold Forum last month, the CEOs of virtually all the major gold miners emphasised that their companies would not be looking at growth for growth's sake and would be closely examining all their new and existing capital projects.

Table 2.: Top 10 Gold Mining Companies by Gold Output
Rank 2012	Company	Gold production (tonnes)
1	Barrick Gold	239.50
2	Newmont Mining	161.74
3	Anglogold Ashanti	122.75
4	Gold Fields	98.80
5	Goldcorp	78.20
6	Kinross Gold	74.00
7	Newcrest Mining	71.10
8	Polyus Gold	46.66
9	Freeport-McMoRan	42.86
10	Harmony Gold	40.43

If one compares the two listings for the Top 10 gold miners it is particularly noticeable that the volume of output does not necessarily correspond with the company's ranking by market capitalisation and much of this difference, on closer examination, relates to the perceived political risk element.

It's not for nothing that the three top gold primary producers by market capitalisation (i.e. ignoring Freeport) all generate the vast bulk of their production from areas that are deemed politically safe - mostly North America and Mexico, although Newmont drops down the list a bit because of significant output from Peru and Indonesia.  The company has been running into some problems in both these jurisdictions. 

But the political risk element really comes to the fore with the South African gold miners - AngloGold Ashanti, Gold Fields and Harmony. All three appear in the gold production top 10, but only AngloGold remains in the top 10 by market cap and at a relatively low 7^th place despite it being the world's third largest gold producer after Barrick and Newmont.  Gold Fields, the fourth largest gold producer by output, fell out of the top 10 by market cap this year due to its share price being knocked back sharply by the South African labour disputes, which have been taking a really ugly turn, and nationalisation debate, while Harmony - Number 10 in the gold output table - would be well down the list in market cap. Unlike AngloGold and Gold Fields, it currently has no significant production outside South Africa, although is looking to gold mining at Wafi and Golpu in Papua New Guinea to provide this - but significant output there is still a few years off. Indeed, Harmony is probably the most vulnerable of the South African miners to gold price weakness as it has the highest cost base given it was built through the consolidation of the assets of mostly lower grade marginal producers.  Conversely, it has perhaps the highest upside potential should the gold price really take off.

Interestingly, developing miners Eldorado Gold and Randgold Resources squeeze their way into the top 10 miners by market capitalisation, although both would fall well down the listing of gold miners by output.  Both have pretensions to grow into significant producers - and despite their main growth operations being in areas which some would consider as having a significant political risk element, they have strong followings among gold investors.

As for the big producers themselves they have been stung by criticisms from the financial community regarding their performance and their treatment of shareholders.  As a result they have virtually all become more transparent in their reporting and have also implemented more generous dividend policies to try and improve their appeal to investors.  There is thus a good chance that in the months ahead, assuming the gold price remains relatively strong and they follow the policies their CEOs are promoting, that they could once again outperform the gold price rise.  They should be generating good cashflow at current gold prices, and dividends should continue to rise as a result.  They may not offer the share price growth prospects of the better juniors in a rising gold market, but remain a much safer investment in a flat or declining one - and offer a yield that is comparable with that of many banks and other financial institutions nowadays.