Gold Mining Industry Shifts
If you need to move a heavy load, an elephant is a good way to go. But a small pack mule might give you a better hauling ratio on those smaller loads.
While mining behemoths like Barrick Gold (NYSE:ABX) and Silver Wheaton (NYSE:SLW) are fantastically reliable gold and silver producers, you will once in a while come across a pint-sized munchkin who just might surprise you, such as Sutter Gold Mining Inc. (TSX-V: SGM).
While both Barrick and Silver Wheaton are large cap companies, with market caps of $31.29 billion and $11.55 billion respectively, Sutter Gold Mining at just $42.7 million is a nano cap—that’s below even micro cap. (Figures source: Yahoo! Finance)
Yet the nano contender may just be able to pull a few good moves over on the elephants.
For a while now, production among the large cap miners has not been up to expectations. As Mining.com recently reported:
“In 2012, for the preliminary estimated corporate production of the yellow metal, total volume of gold mined by the top 10 publicly traded companies dropped roughly 3.4%, from 32 Moz in 2011 to 30.9 Moz.
Seven out of 10 companies faced decreases in their attributable gold output...”
For this and other reasons, share prices for most miners have steadily declined over 2012.
Barrick’s share price, for instance, has “shed about 34 per cent (including dividends) over the past year. Investors have been concerned about Barrick’s focus on growing reserves as opposed to return on capital, as well as its rising debt load and acquisitions that have not lived up to expectations,” informs Canadian newspaper The Globe and Mail.
As a result, the company recently changed its leadership. “Barrick installed Jamie Sokalsky last summer as the new chief executive officer,” the newspaper points out. “The former Barrick chief financial officer has vowed to cut costs and sell off non-core assets.”
This reprioritising by the mining giant was applauded by Robert Gill, a portfolio manager with Aston Hill Financial Inc.
From The Globe and Mail:
“'We like the focus on free cash flow, profitability, increasing the dividend yield and returning cash to shareholders,’ he said. ‘What you are going to see management do is focus on developing resources in the more safe regions of the world, and also try to stick to the projects with higher return on capital and lower costs to develop.’”
So things are changing. The largest elephant in the room is turning himself around, even though he might end up knocking someone out of the room in the process.
The other elephant can also be seen stomping out new ground of its own. “While we have traditionally focused on silver, we have never been averse to strategically adding ‘the right’ gold streams to our portfolio,” announced Chief Executive Officer Randy Smallwood, as reported by Bloomberg in an article earlier this month.
And it looks like they have found “the right” gold stream. The previous metals purchaser “agreed to acquire gold mined by Vale SA in Brazil and Canada for $1.9 billion in cash and 10 million share warrants. [It] will buy gold equal to 25 percent of the life-of-mine gold production of Vale’s Salobo project in Brazil, [and] will also get 70 percent of the gold output from mines in Sudbury, Ontario, over 20 years,” outlined the Bloomberg report.
With this one stroke of the pen, Silver Wheaton’s gold production has increased by 110,000 ounces annually. Its silver production will also be increasing from the current 33.5 million silver equivalent ounces in 2013 to 53 million by 2017.
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But while these elephants are turning around and clearing new paths as they trek, sometimes it’s the little mules that can surprise you the most, with incredible feats of strength and agility for being smaller and more nimble.
Our little pack mule, Sutter Gold Mining Inc., for example, has walked himself right into the famous “mother lode” in the Sierra foothills of California.
“[The] stretch of Amador County was called ‘the mother lode’ for a reason,” recounts the news department of a local San Francisco television station. “More than 7.5 million ounces of gold were mined there. But by the 1950s … the last of the big mining operations closed.” “Now the miners are coming back.”
And Sutter Gold Mining is right on top of it. “We are in the heart [of] mother lode,” SGM’s Leanne Baker proudly announced. “We are in the 10-mile stretch of the mother lode that produced 60 percent of all the gold produced.”
And the company believes there is more that was left behind—much more. “We have a reserved estimate of approximately 650,000 ounces," chief geologist Art Campo informed. At today’s prices, that’s more than a billion dollars’ worth.
What may have been prohibitive for mining companies 50 years ago to completely extract is affordable now, thanks to newer mining equipment and a much higher gold price. Mill designer Paul Danio explains to the San Francisco station, “The efficiency of the recovery is about 30 percent more efficient than what the old timers could have done.”
With Sutter Gold Mining’s stock trading at just 36.5 cents a share, it wouldn’t cost much to take a ride on this little mule into the heart of the Mother Lode.