Alice in Wonderland was told to run as fast as she could simply to stay in the same place. It's the same for miners. They have to run just to stand still by finding new reserves to replace those that have been mined. To grow, they need to run twice as fast. But for company boards that go for the expansionist approach, shifting from a single to multi-mine operator is not easy.
The North American and Australian markets see more of a churn in listed miners, as there is a consistent pattern of companies rising and then being taken out by bigger operators. Now the UK market now has a handful of companies pushing to get beyond junior or single operator status.
There are a few that have run into trouble with an expansionist approach and cost shareholders dearly – Resolute Mining (RSG) and Hummingbird Resources (HUM) are two clear examples, after already starting on the multi-operation journey. Outside the gold space, vanadium miner Bushveld Minerals (BMN) is another that promised plenty and handed shareholders consistent losses. Production at its vanadium mine in South Africa has increased consistently, but its cash profits peaked in 2018 at an incredible $91mn due to high vanadium prices, and its share price has slid since then – two-thirds in the past year alone.
“The mining sector is also a graveyard [of companies] who tried to grow too quickly, or in the wrong way,” says Shanta Gold chief executive Eric Zurrin. His company has just celebrated its first gold pour at a new mine, Singida. He said the cyclicality of the sector meant it was much harder to plan compared to other industries.
“Imagine being the CEO of John Lewis and you don't actually know what the selling price will be three months down the line,” he says.
The consequence of this uncertainty is building in protection from risk - through selling gold forward, as Shanta has done, or just avoiding too much debt. Some industry financiers are happy to hand over convertible debt, which means they take big stakes if things go south, diluting other shareholders.
Out of all the mining companies listed in the UK, only a handful have managed to make that junior-to-midcap transition. One, Petropavlovsk, is now delisted because of its Russian base.
So why is it so tough, especially when there is such strong demand for metals like copper and lithium, and buyers are still craving gold?
Mid-tier earth
One UK-listed miner has specifically gone out and published a ‘mid-tier’ growth strategy this month. Anglo Asian Mining (AAM) has a single mine in operation in Azerbaijan but is hopeful a handful of expansion options will take it to the next level. Its 2022 production was 43,114 ounces (oz) of gold and 2,516 tonnes (t) of copper. These are not huge numbers, and come from a single mine.
But the board (led by key shareholder, founder and chief executive Reza Vaziri) has now laid out a plan to more than double production in five years, getting to 175,000 oz gold equivalent. This revolves around both using the existing plant at the Gedabek mine while also turning potential copper deposits into fully operating mines with a new processing plant in that time. The potential lies in Azerbaijan’s undeveloped mining scene - Anglo-Asian has effectively taken on anything that looks promising in the country, which is more known for its gas reserves.
Financing is where this all gets tricky. The initial stages of the plan are the easiest to pull off, as it is just the mining that needs to happen.
It’s worth noting the two new deposits that will feed into the Gedabek plant, Zafar and Gilar, do not have defined reserves under rules brought in to protect investors from companies using back-of-the-envelope calculations in mine planning.
Anglo Asian chief operating officer Stephen Westhead said he was qualified to designate the resources to the ‘JORC’ standard (the Australian standard used internationally), but highlighted the company was not going to be borrowing or going to public markets to fund the smaller expansions, although it is obviously pitching its growth plans to retail investors.
He said the larger expansion projects would have reserves checked off under that standard.
Why expand
Getting one mine operating smoothly is tough enough - but therein lies the reason to spread risk.
Centamin (CEY), the Egyptian gold miner, and Shanta, have both felt the wrath of shareholders when an issue at their solo operating mines (until this month, for Shanta) knocks production. Valuations across the pond show the penalty paid by single-asset companies – miners with a similar production level to Centamin (400,000 to 500,000 ounces a year) across multiple operations being rated more highly.
Eldorado Gold (US:EGO) sits on an enterprise value to Ebitda ratio of 7.4 times, compared with Centamin’s 4.6 times. Silver and gold producer Coeur Mining (US:CDE), which has a similar sales level to Centamin from four different mines, is spending heavily on an expansion project, but even on a price/sales metric is far ahead of Centamin.
This rule is not hard and fast – fellow Canadian miner Lundin Gold (CA:LUG) also has one mine with similar output to Centamin’s Sukari, but its Fruta Del Norte operation is much newer and lower cost, and frankly, it is listed in a country that loves gold stocks – evident in the market capitalisation of C$4bn (£2.4bn).
We're not trying to do down Centamin, which we are bullish on. But it does show there is a premium for a company with less concentrated risk. The Egyptian miner is aware of it, too – while also continuing to work on Sukari (improving operations and adding reserves through exploration), the company is pushing ahead with an exploration project in Cote d’Ivoire, although it delayed publication of the key pre-feasibility study last year.
No risk no reward
As Zurrin says above, taking on huge amounts of debt makes for a risky growth strategy.
Resolute Mining, which has both Australian and UK listings, ran into trouble after borrowing to build a new mine in Mali, Syama. This saw first gold in 2019 but then hit operational issues that sent it into the red despite high gold prices. Investors were pummelled as a result – in January 2020, the company raised A$194mn (£104mn) at A$1.10 a share, and by November of last year, it raised A$164mn at A16¢ a share – doubling its issued equity.
The balance between risk and reward is difficult. Endeavour Mining (EDV) swiftly became a much larger gold producer between 2019 and 2021 by swallowing two other mid-cap miners, and loading up on debt. It happened to be doing this while the gold price soared, allowing it to go from over $500mn net debt in 2018 to net cash at the end of 2022. At the same time, cash profits rose from around $200mn in 2017 to an estimated $1.2bn in 2022.
It helps that Endeavour is backed by Egyptian billionaire Naguib Sawiris, so a debt spiral was always unlikely, but its roll-up of Semafo and Teranga Gold became a successful bet on the gold price going the right way.
Another roadblock to growth, alongside price and asset risk, is finding something to build or buy in the first place. Central Asia Metals (CAML) has adopted a sensible growth strategy – adding the Sasa lead and zinc mine on top of its foundational Kazakh copper operation, and then paying down debt significantly before thinking about a new acquisition.
But the miner has been openly looking for another mine or development project for more than three years. In 2022, management looked at 40 potential deals, signed non-disclosure agreements with 17 potential sellers, and went to visit two sites – total deals announced: zero.
Chief executive Nigel Robinson told Investors’ Chronicle last month that the right opportunity just hadn’t come up. “The big challenge is finding the right opportunity that shareholders would appreciate us investing in, because it would be accretive to their dividend and the value of the company,” he said.
The ideal for CAML is an operating mine, or one with the bulk of the development work done but this means a sale price “close to one times” net present value, he said. That would be a bill of at least tens – if not hundreds – of millions of pounds for CAML, putting the all-important dividend at risk. “Where we're primarily looking is earlier stage where we can use our own balance sheet [to develop the project],” Robinson said. This obviously adds to execution risk, but in a sellers' market, that is perhaps the only way.
This route rules out a rapid climb in size or status for a miner, but this is the reality. There is heavy demand for assets and deals like those done by CAML and Shanta in recent years, which bought up a suite of Barrick Gold (US:ABX) assets in Kenya for cheap, are unlikely to be as easily available now.
To go back to the Alice in Wonderland metaphor, running twice as fast increases the risk of tripping, but this can be righted. Resolute Mining, with its far-bigger share count, is now up almost 400 per cent since its November raise.
