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Diversification is the new mining buzzword

According to Newmont’s CEO Tom Palmer, along with “a very volatile economic environment” including inflation, interest rate hikes and the war in Ukraine, gold miners are facing cost inflation in labor, fuel and energy, as well as materials and consumables, “continuing into the better part of 2023.”

Shaun Usmar, CEO of Triple Flag Precious Metals Corp, was quoted by Bloomberg saying that current hawkish measures being pursued by central banks, i.e., aggressive monetary tightening to bring down inflation, which has lifted bond yields and the dollar, pushing gold prices down, could make it challenging for single-asset producers and development companies that may not have the financing means to absorb costs and increase capital.

For these companies, the equity markets aren’t accessible, and if they are, it’s very expensive and dilutive. Such an environment leaves room for mergers and consolidations, especially for miners with cash and a need to grow, said Usmar, who was Barrick’s CFO from 2014-16.

Last week, the Globe and Mail reported Agnico Eagle Mines is teaming up with Teck Resources to buy a copper-zinc project in Mexico, in what would be a major departure from precious metals for Agnico.

The Toronto-based company, with stock symbol AEM, has gold and silver operations in Canada, Australia, Finland and Mexico, including Canada’s largest gold mine, Canadian Malartic, and the Meadowbank Complex, located in Canada’s far northern Nunavut territory.

Agnico Eagle said last Friday it will pay USD$580 million for a 50% share in Teck’s San Nicolas copper-zinc mine in Zacatecas, Mexico.

The Globe notes that AEM, Canada’s second-biggest gold producer, is currently heavily weighted to precious metals production (about 99%), but once San Nicolas starts up, precious metals would fall to 87% of the company’s output.

Agnico is not alone in increasing its exposure to copper and other green-economy metals, including lithium, graphite and nickel. The latter, seen by investors as ESG-friendly, fit with another decision many mining companies are making, i.e., distancing themselves from “dirty”, old-economy materials like coal and oil.

Even the so-called experts are wrong about critical metals supply

Teck, for example, has said it is open to selling its stake in the Fort Hills heavy oil project in Alberta, and is actively looking at either unloading or spinning off its metallurgical coal unit. Meanwhile, the Vancouver-based firm is moving its business towards copper by building a major new copper mine in Chile, called Quebrada Blanca, or QB2.

About 20% of Barrick Gold’s production now comes from copper, and as mentioned, in 2020 CEO Mark Bristow indicated his interest in Grasberg, then US copper mining giant Freeport McMoRan’s flagship asset (the mine is now co-owned by Freeport and Inalum; the latter, a state-owned miner, becoming a 51% majority owner in 2018 through a $3.9B payment to Freeport and Rio Tinto).

At the time, Bristow said he believes copper will be “the most strategic metal on this planet” in a decade, due to its use in electric vehicles and other clean-energy applications.

The Financial Post reported in its Tuesday edition that Bristow several years ago engaged in unsuccessful merger discussions with Freeport-McMoran. The CEO reiterated his interest in the base metal. “Copper is probably the most strategic metal, and it’s geologically related to gold,” he said. “So if you want to become a world-leading gold company in the fullness of time, you are going to end up producing [copper].”

The Financial Post notes that if gold prices continue to slide, other gold miners may also look to make copper, zinc and other metals part of their portfolio.

While not a gold company, earlier this month Rio Tinto said it is willing to pay $4.2 billion to buy the 49% of Canadian producer Turquoise Hill Resources it doesn’t already own, effectively giving the Anglo-Australian multinational control of the massive Oyu Tolgoi copper-gold mine in Mongolia (Turquoise Hill owns 66% of Oyu Tolgoi, with the Mongolian government holding the remaining 34% interest).

Diversification hasn’t always been as important to mining companies. Miners in the mid-2010s basically ate each other and by shutting down exploration there was no accretive increase in reserves. After years of selling “non-core” assets, mining firms are coming around to realizing that diversification is good.

In a 2021 article, Investors Chronicle writes that, while companies that consolidated into one or two commodities took advantage of higher prices last year, any supply increase or demand deterioration in these markets could sink profits quickly. 

To help guard against this, BHP (BHP) and Rio…

Read More: Diversification is the new mining buzzword

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