Have sprawling precious metals conglomerates become too unwieldy and inefficient to provide stakeholders with the best value possible?
Former McEwan Mining president Ian Ball thinks so. He advocates a "back to the future" approach to precious metals mining that boils down to a single phrase: "One company, one mine".
Gold Industry Veteran
Abitibi Royalties president and CEO Ian Ball is no newcomer to the gold mining sector. A protege of the legendary Rob McEwen, Ball worked under him for over ten years, starting at Goldcorp (which McEwen founded) and then at McEwen Mining. His career at McEwen started as VP of Mexico Operations, overseeing projects from exploration to production. He gained promotions up to and including as president of McEwen Mining. He was noted for his hands-on style when shepherding a project from exploration to production.
As you can see, he has excellent bona fides when discussing the inner workings of a major gold mining company.
Bigger Not Necessarily Better
Ball traces declining profits in the gold mining sector to over-extension and over-diversification. He saw first-hand the inefficiencies of having mining operations in four different countries, and trying to coordinate with them all from Toronto.
He believes that the industry's largest companies were enticed by high potential projects scattered all over the world, instead of expanding their presence around currently active mines.
This meant that infrastructure and support systems had to be duplicated for every mine. On the other hand, two mines that are near each other can share a smelter and other processing assets, as well as sharing the same roads and connection to the electrical grid.
In addition to the hard assets that have to be replicated for each mine, there is a separate management team for each location. Company geologists have to hop all over the world from mine to mine, instead of learning one mine intimately to maximize production.
Ball claims that the whole idea of diversification in the gold mining industry is a flawed concept. Mining is an industry built on extracting depleting assets. Every mine has unique geography, advantages and challenges, meaning that it is impossible to come up with a one solution fits all business plan. When one far-flung mine is exhausted, the infrastructure in place is useless, unless a new deposit is found nearby.
Everything Old Is New Again
While the mining behemoths have recently increased shareholder value, Ball said that it a one-off event caused by cutting costs, selling non-core assets, and greatly reducing their exploration budgets. He says that if a gold mining company can't outperform the price of gold, it should just return all the money to the shareholders and close up shop.
Looking back at the history of his mentor Rob McEwen, Ian Ball notes that Goldcorp only had one major mine. This meant McEwen “literally every day he would go into the office with a laser focus on that mine,” Ball said. Since Goldcorp headquarters were relatively near the mine, it meant that senior executives could go on-site to solve any problems, instead of trying to hash it out over the phone from a different time zone. Ball took that lesson to heart, leading him to call for a return to the "One company, one mine" concept. In a recent interview with the Financial Post, he said:
"You look back to the great fortunes that have been made in Canada, it’s always been one mine per company. It was Goldstrike, Barrick; Red Lake, Goldcorp; LaRonde, Agnico Eagle. When they started diversifying was when the returns started to go down.”
Breaking Up Is Hard To Do
Ball advocates a break-up of the giant multinational gold mining majors into a series of companies each focused on one mine. “If you had a management team, who had most of their net worth tied to that one asset, they can have laser focus on developing it,” he said. This would result in improved production at every mine.
In his scenario, Barrick for example would break itself up into ten companies, each focused on one mine. Barrick shareholders would receive one share of each of the ten companies for every Barrick share held. This would flush out any "turkeys" in the company's portfolio. Non-productive mines would have to improve operations or see their stock drop to zero, instead of being "carried" by more successful mines in the old company.
Some of the problems with breaking up a gold mining major include how to divide associated assets among the spinoff companies, or finding a buyer for centralized assets. The largest problem would probably be the resistance by executives and the board to losing the salary and bonuses that come from running a giant conglomerate.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.