Gold miners will need to figure out what to do with free cash flow: Canaccord Genuity's MacRury
Gold companies are vowing to give investors a greater share of the windfall from surging prices, without losing the fiscal discipline that’s returning to the industry.
Even as bullion bounces around near record heights, helping lift miners’ cash flow and share prices, the mood -- at least virtually -- at the Denver Gold Group’s annual Americas conference this week was conspicuously cautious. The tone was exemplified by executives including Agnico Eagle Mines Ltd. Chief Executive Officer Sean Boyd, who put it this way: “It’s not party time.”
“It’s not the time to blow up capex budgets and introduce risk,” Boyd said in a presentation. “Our view is to keep the risks low, keep the share count down, and focus on taking advantage of the current gold price in generating that free cash flow and returning it to shareholders.”
The gold industry descended into a dark phase about a decade ago after disastrous acquisitions and over-expansion bloated balance sheets and sent generalist investors scurrying elsewhere. While the sector has since restored a large measure of fiscal discipline, there are lingering concerns that the restraint could quickly dissipate if gold prices remain high.
The memory of deals gone bad in the last cycle still lingers in the minds of many investors. Those include Barrick Gold Corp.’s 2011 multibillion-dollar acquisition of copper producer Equinox Minerals Ltd. Barrick saw debt swell and took a $3 billion writedown on the Zambian mine it bought after the top-of-the-cycle purchase.
Big gold producers have indicated at the Denver Gold show this year that they remember the lessons of the downturn, said Rick Rule, CEO of Sprott U.S. Holdings.
“The last decade was punctuated by a lot of idiocy, and I think that both investors and managers at the biggest companies have come to understand that,” Rule said Tuesday in a phone interview. For a time at least, he expects “new investments in terms of putting a project in production or doing acquisitions will be measured against returns of capital to shareholders.”
Amid the rising gold prices, Barrick CEO Mark Bristow said his company is considering a more formal structure for its dividend policy. The timing will depend on its net-cash position and how the global pandemic develops, he said in a live presentation. He also said the global miner intends to keep a minimum cash balance.
“You don’t want to be held ransom by the capital markets,” Bristow said. “So you need to be able to manage crises in the full gold-price cycle.”
To be sure, different companies in the sector will have different priorities for the free cash flow that’s expected to pour in. For Franco-Nevada Corp., a royalty and streaming company, the plan is to spend the bulk of the cash to acquire more deals, CEO Paul Brink said in a Denver presentation. “And then obviously the second use for it is paying dividends.”
Whatever Franco does, though, the question is by all vantage points a pleasant one. “That’s always a high-class problem: to discuss what to do with your cash,” Brink said with a smile.