While some gold companies may boast attractive valuations at the
moment, the atmosphere for mergers and acquisitions in the sector
has cooled down considerably in the last year or so, says Jamie
Sokalsky, president and chief executive officer of
At the Bloomberg Canada Economic Summit this week, Sokalsky said
the general mood is "anti-M&A" in the gold space, particularly
at the senior level.
Although valuations are low, Sokalsky noted that such acquisitions
might require billions of dollars in additional investment to build
a project, while achieving production may take a long period of
time. Investors are also hoping for free cash flow, which he said
they would perhaps rather see "returned to them in a higher
dividend at some point."
Sokalsky also said that a trend amongst mining companies in the
last 10 to 20 years toward chasing production for the sake of
chasing production has "ultimately has come back to bite the
industry" with a drop in the gold price affecting rates of return
on some of those investments.
"We've been on a treadmill as an industry where we take the money
that we've earned as the gold price has gone up and just plowed it
back into ever increasing projects - higher cost projects, higher
operating costs, higher capital costs, and ultimately didn't see
the returns of cash that investors anticipated and so we need to
really change our mindset as an industry and for us, what we're
doing is we're actually reducing our production on previous
targets, because those returns on that production wasn't high
enough," he said.
"Ultimately, you can't just keep relying on the gold price and
that's how we're running this business; it's a greater focus on a
greater return," he added.
Broadly, he noted, the industry's paradigm is shifting toward
returns driving production, rather than the other way around. After
his appointment as CEO last June, Sokalsky initiated a review of
Barrick's mines and projects "to evaluate their rates of return and
ability to generate free cash flow as part of a more disciplined
capital allocation framework." The company is also looking at
selling a number of non-core assets.
Ultimately, Sokalsky said divesting smaller, higher-cost assets and
focusing on a suite of long-life, low-cost assets could be a better
"For Barrick, if we became smaller but made more money and we're
more valuable, that's absolutely something that we would do," he
At the moment, Sokalsky said that Barrick remains committed to
addressing environmental issues at its Pascua-Lama project, which
sits on the Chile-Argentina border. The project, in which Barrick
has $5 billion invested to date, is currently suspended on the
Chilean side until environmental issues are corrected. Sokalsky
explained that the company will be able to decide on a path forward
for Pascua-Lama when it receives additional information from the
Chilean government, which it expects in the next few months.
When it comes to the gold price, the metal's recent moves
represented a major mid-cycle correction in a long-term bull
market, said Sokalsky. In the medium-term, he said, getting back up
to the $1700 to $1800 range is achievable.
"There are times when the cycle will set back and I think the
ultimate factors that are in place for a continued rise in the gold
price are still there," he said.