The mining sector is infamous for not following confirmed enterprise rules that guarantee worth creation for shareholders by the ups and downs of the commodity cycles, senior govt Ian Telfer advised a mining convention in Vancouver this week.
In his view, the previous Goldcorp and Wheaton Valuable Metals govt sees the acquisitions as the one dependable method to develop an organization.
“We’ve been speaking about exploration, however the reality is you’ll be able to’t construct a serious mining firm on exploration alone,” he advised the AME Roundup on February 1. “It by no means will occur.”
He mentioned mining was an exceptionally technical business requiring many disciplines to achieve success.
Nevertheless, these technical folks aren’t at all times comfy with the acquisition course of.
“It’s a course of that’s outdoors their space of experience. No matter they take a look at seems costly.
The method of getting there may be sophisticated and might be adversarial. Due to this fact, not everybody within the business is as comfy with going by acquisition, but it surely’s the one manner you will get there.”
Telfer additionally cautioned administration towards pursuing grassroots exploration in any respect prices. “You merely can’t develop a serious mining firm by exploration. There’s a task for exploration within the junior sector, and several other massive mining firms began with exploration success, however you simply can’t rely on it going ahead,” he mentioned.
Repeatedly, majors have sunk important funds into exploration solely to find lower than they’d hoped for at a better price.
Telfer additionally advises towards putting the “clever and worldly’ on boards of administrators.
What tends to occur when folks with experience from different areas, whether or not it’s company governance or whether or not it’s monetary markets or succession planning, develop into a member of the board, they’ll finally begin imposing totally different concepts on what the corporate ought to do subsequent.
“Despite the fact that you might have created the corporate and your imaginative and prescient might have led to the corporate’s success, these folks all of a sudden begin to have robust opinions about what the corporate ought to do subsequent. And I’ve seen a tragic instance for my part. Placer Dome was an organization we took over 10 or 12 years in the past as Barrick. That they had a terrific board of administrators and wonderful folks however no singular imaginative and prescient of the place that firm was going. And over time, they only misplaced their manner and collapsed. Comparable tales with Inco, Falconbridge additionally misplaced their methods,” mentioned Telfer.
Additional, Telfer cautioned miners towards taking over debt.
“That will appear apparent, and with increased gold costs that we’ve had not too long ago, not that many firms are getting themselves in bother. However I’ve lived by quite a few cycles, the place firms put themselves out of enterprise by blowing an excessive amount of cash.”
In the identical vein, Telfer advises towards firms hedging manufacturing.
“One in all my favorite matters in regards to the gold mining business is that gold shares are solely purchased by individuals who suppose the value of gold goes up,” mentioned Telfer. “And at any time when they get the impression that managements are investing in issues resembling hedging that reveals their perception the value might go down, buyers abandon an organization,” he mentioned.
He pointed to Barrick going by this phenomenon about 15 years in the past when administration thought the value of gold had peaked. “They did a large $10 billion hedging program, after which the value of gold saved going up. And two issues occurred.
“First, they needed to settle and write a test to repay three out of the cash hedges they placed on, and quantity two, the shareholders deserted the corporate.”
Telfer inspired miners to overpay for good belongings, one of many trickier pointers.
Excessive-quality belongings are scarce, they’re laborious to seek out, and so they’re laborious to purchase. And at any time when they probably develop into accessible, they appear overpriced.
“My expertise has been you’ll be able to’t overpay for good belongings. Once more, should you imagine the value of a commodity will go up, that may convey you from what would possibly seem like an costly asset at this time and make it look extra fairly priced sooner or later,” he mentioned.
“I simply can’t overemphasize overpaying for good belongings. Stretch your self to get them as a result of they’re uncommon. They aren’t like streetcars. They don’t simply maintain coming down the street. In case you imagine the value of gold goes up, as try to be, that asset will develop into extra affordable sooner or later.”
Telfer additionally inspired miners to conduct their acquisitions by way of shares. “While you’re about to problem shares with money or problem shares to purchase an asset, folks obsess over their share value day-after-day. You don’t must. In case you suppose you’re on the precise path and doing the precise issues, the market will rise to replicate that going ahead.”
Emphasizing his level of believing within the gold value, he thinks administration ought to at all times wager on a rising gold value.
“That is what your shareholders need. That is what hopefully you imagine. And so, when you find yourself making acquisition or improvement or growth selections, you need to assume the value of gold goes to remain the place it’s or go increased to make your choice. As a result of if there’s some flat gold value, you’ll by no means do something,” mentioned Telfer.
One other pointer is to pay shut consideration to political danger.
“There are a number of firms now which can be being punished by the politicians and the nations that they’re working in. They’re having the tax charges jacked up, or belongings are taken away or having the federal government demanding shares.”
Telfer mentioned firms needed to pursue many acquisitions to develop, circling again to his preliminary recommendation.
“Whereas researching potential acquisitions, fashions are normally constructed on any variety of assumptions to reach at an appropriate value. “Nevertheless, typically that asset is healthier than you anticipated. Many instances too, the asset is not so good as you anticipated. And so, my recommendation to anybody is don’t wager on making a silver bullet-type acquisition to construct your organization and cease there. Maintain going as a result of one of the simplest ways to diversify is to accumulate extra belongings,” mentioned Telfer.
Lastly, Telfer urged miners to not pay dividends.
“My commentary of our business is that we don’t generate sufficient money to function our mines and demobilize them when they’re lastly completed, purchase new belongings to switch ore reserves that we’re depleting day-after-day, after which pay dividends on high of that. It doesn’t make sense,” mentioned Telfer.
“We even have firms which have borrowed cash to pay dividends, which is insane. And we now have firms whose reserves and the standard of their reserves are happening day-after-day. After which they’re utilizing the money they must pay dividends. It’s an unbelievable scenario.”
He identified a number of mid-tier miners weren’t paying dividends, but buyers have been piling into the shares. “It’s due to the underlying worth of the reserves and future potential of the money flows. That’s why folks purchase the shares,” mentioned Telfer.
“Sure, massive establishments love the dividend as a result of should you’re a gold fund, it’s essential to purchase gold shares, so that you need to purchase ones that may pay one thing. However most individuals that purchase gold shares should not shopping for them for the dividends. So, I believe that’s a waste of cash,” mentioned Telfer.