Australian Gold Mining – Potential M&A Drivers & Geoeconomic Profiling – 18 August 2020

Some analysts have predicted mid-tier gold miners cannibalising each other, resulting in fewer mid-sized gold miners coming out of the current gold boom. What are your thoughts on this? Do you expect increased M&A, and would you agree that it’s going to be in the mid-tier space?

Would you draw any parallels between the elevated pricing environment and expectations of geopolitical uncertainty driving higher prices now to the post-GFC [global financial crisis] period when gold prices last rose to significant levels? If so, what should we expect from the miners, especially in Australia?

Does the AUD being more depressed than it was at the GFC relative to the USD create a regional incentive for Australian miners to explore near-term earnings leverage? Presumably an Australian miner has a large part of its cost base in Australian dollars. Is the margin leverage incentive quite large?

You said you expect mid-tier players buying juniors or juniors buying juniors. If we think about that being the category where we could expect the most M&A, is the implication that the transaction doesn’t result in ready-to-market ounces? If we think about mid-tiers buying juniors, yes, they’re expanding their resource bases, but a junior typically isn’t producing, so would you say that the earnings leverage argument, while obviously strong, isn’t strong enough to drive the majority of M&A?

Is there a sense that when junior companies pick deposits up in a higher pricing environment with expectations that pricing will sustain in the medium-to-long term, they’re picking up these deposits at a discount or that the resource is larger if we assume higher prices? Would the cost rate drop in the current environment?

Would you expect a major or mid-tier miner that has great access to capital and is willing to shell out and build up its resource book and pick up deposits whether they’re operating or not to be exposed to greater operational risk on these transactions?

When we think about your suggestion that a lot of M&A in the Australian gold-mining industry is likely to be driven by mid-tiers buying juniors or juniors buying juniors, how will that affect the exploration and development cycle? Where will the attractive assets sit on that spectrum? Would you expect most of the lucrative assets to be earlier-stage or are they going to be in post-PEA [preliminary economic assessment] stage or even in pre-construction or pre-production?

Let’s go with your base case that development and exploration assets get most of the attention in this market. Until a mine starts producing, you don’t really know what the headline figures are going to be. Do you think the current environment might have a material impact on any aspect of dealmaking?

What were your thoughts on the dealmaking post-GFC? Were there rash decisions, and would you expect them to be mirrored in this period, or are there key differences?

How do producers typically squeeze production or try and front-load cash flows at higher prices? What options are usually available to them? Will they draw down stockpiles close to the crusher and rely on those lower-grade ore piles?

Is there any expectation with regard to the major equipment? Is there a thought that, especially in this purchasing environment, you want to sweat your loaders have them running as many hours as possible to lean out the cost structure there as well?

Where are the major Australian gold-mining companies and assets placed and how much will that impact the economics? Have state-specific considerations such as royalty and permitting systems trended any one way? Is one state becoming more friendly or less friendly?

How should we think about the reactivity of states and how they payload their permitting processes? I highly doubt they will make the permitting process easier when prices are this high, but would you say that current permitting systems are fairly static and unlikely to allow any juniors that want to increase exploration activity right now?

Can you talk about the geoeconomics in Australian gold mining and the geological features of where the assets are concentrated in Western Australia, for example? Are there any key trends that might define the way cost structures in this industry change over the medium-to-long term?

How important is labour-intensity to maximising earnings leverage as a miner in this high-price environment? Do you really need to double the labour force to sweat out that extra 1,000 ounces or so?

Are there any emerging trends in mining methodology, if we talk about open cut or open pit vs underground as the traditional mining methodology? What about the derivatives, sub-level and block caving and so on? Are assets starting to develop and use more complex methodologies to increase reserves and improve economics?

How should we approach the trend of going underground in terms of industry-blended economics? Does going underground carry a higher capital cost but also yield higher-grade ore? Is there any difference in the recoveries because the material is less oxidised vs an open pit?

As you mentioned, with a higher gold price you would expect the cost of production and the cost structure of producing miners to be significantly altered. What are your thoughts on the cost of exploration? For example, you expect labour inflation to be an issue. Would you expect lease rates or the price tags for drill rigs to increase as well?

What sort of lead times are there on drill rigs?

If we talk about more exploration activity, or the pipeline assets entering that feasibility stage or a PEA or beyond, my assumption is there will be higher pricing inputs for new technical studies. Would you imagine that will result in a change in the cost floor or where the minimum cash costs or all-in sustaining costs fit on a blended basis for the entire industry? Will the cost structure for the entire industry come up in a similar fashion to where the price goes?

What should we monitor in the Australian gold-mining industry in the near-to-medium term?