For gold miners, copper used to be a four-letter word. “Pure” gold stocks traded at a premium to diversified miners and, for the most part still do. And, even if they did pull other metals from the ground, the companies considered them as by-products, credits to be used to offset the cost of getting an ounce of the good stuff out of the ground.
But, gold mining has changed. For the most part, mines are deeper these days, grades are lower, costs are higher and new ounces are harder to come by.
Thankfully, prices of the yellow metal are higher too so it’s not all bad but, it is not only the mechanics of mining the yellow metal that have got tougher; the global economy is struggling, financing is harder to come by and investors are demanding more for their money.
No longer is it enough to be the provider of exposure to the gold price, ETFs do that just as well, investors these days expect management to, well, manage. They want them to employ their capital efficiently, they expect them to generate cash and, they expect them to reward shareholders.
In this kind of environment, gold miners can no longer afford to look cash-generating gift horses in the mouth, especially ones that add to their mine life and often come attached to gold ounces.
Speaking at the RBC Capital Markets 10th Annual Gold Conference, Newmont President and CEO, Richard O’Brien said that the group’s exploration arm has been re-oriented to see the discovery of copper ounces as a success. “Before, we considered finding copper a failure”.
So what has changed?
Part of the reason is that it is becoming harder and harder, especially for the majors to find large enough pure gold deposits to replace those that are being mined out.
As one analyst told Mineweb on the sidelines of the conference, gold miners are looking at copper-gold porphyry more out of necessity than anything else.
Another reason why copper is becoming more important, O’Brien explained, is that it allows one to extend the reserve life of an asset.
Harmony Gold CEO, Graham Briggs said something similar on the release of its quarterly results recently in relation to the massive Wafi-Golpu deposit it is developing in partnership with Newcrest.
The project has been described as the gold find of the century but, Briggs said it is rather reminiscent of Freeport McMoRan’s Grasberg copper-gold mine.
Briggs explained that having a big copper mine allows one to think slightly differently as the timelines for a long-life copper mine are different to those of a gold mine and, significant amounts of cash are generated.
And, he says, because of this, one focuses a lot more on keeping the operational cost down in the future.
“You make slightly different investment decisions on your capital, on how you build it [a mine]. Every cent you can get cheaper in the operating environment, you want to be able to do that. So often the capital decisions that are made are fairly long-term.”
And, finally, there is the cash that is generated from copper mines – cash flow that can be put to work to fund expansion and exploration.
Barrick, with its acquisition of copper miner Equinox Minerals earlier this year, also took a step toward increasing its exposure to the industrial metal .And, while Barrick CEO, Aaron Regent, during his presentation at the same event, made sure to emphasise the fact that the group is still the world’s largest gold company aims to stay that way, it is bullish on the price of copper.
“It is really a function of macro trends ,which are very powerful and we don’t think they are going to change much. There may be some volatility from time to time. but, we see the industry struggling to maintain production in the face of declining grades, labour disruptions and weather disruptions. Discovering projects and putting new projects into production is hard and it is taking longer. so we think the industry is being challenged about the supply response which means that prices are going to have to ration demand and it is against that backdrop we think copper will do well.”
All in all, while gold miners make sure to emphasise their gold credentials, these days pointing out the prospects of a copper project and the cash flows that it is likely to generate is no longer a dirty little secret.