Strategic Focus on High Quality, Low Cost AssetsMon, 10/21/2013 - 09:18
Q: How do you view the current market conditions for gold mining companies?
SP: If you look at the majority of gold mining companies their strategy has been to get bigger purely for the sake of growth, with major managerial decisions being made based on the sole objective of producing more and more gold rather than maximizing financial returns for the company’s shareholders. AuRico Gold’s management team started 2012 by adjusting its strategy in this area. We could see that shareholders were becoming disenchanted with this constant pursuit of growth, so we decided that it was more important to trade up on the quality of the assets in our portfolio. Our definition of quality is based on four key criteria: location – we want all of our assets to be based in North America; the quality and size of the deposit – we are looking for mines with good potential for longevity; potential production cost – we are looking for assets that are in the lower production cost quartile; and the potential for internal or organic growth – if you look at the two assets that we currently have, the production is growing year after year, so we do not have to acquire that growth.
When we applied this filter to the properties that we had in our possession in 2012, two of them met these criteria and the other four did not. Two of those four assets were located in Australia and therefore did not meet our geographical requirements. The other properties, while located in top jurisdictions, were higher cost, lower margin assets with limited potential for increased mine life. We were diligent in our analysis and determined that it was in the best interests of the company and its shareholders to sell those four assets, and in doing so we raised in excess of US$1 billion. We now have a good asset base that is underpinned by a very good balance sheet. We have approximately US$250 million in cash, no corporate debt, and are paying dividends to our shareholders. We have also bought back a number of our shares, thereby reducing our shares outstanding.
Q: How has this change in the company’s portfolio impacted the way in which AuRico Gold works?
SP: It has really simplified the company and streamlined our operations. If we still had those four properties in our portfolio in the current market conditions, the company would be in a less favorable position. We would have one or two assets that would not be producing, and having to address the resulting challenges would have distracted our management team from our better properties. This strategic decision has put us in a very good position, and we were very fortunate with our timing – if we would be trying to do that in today’s market we would not be getting the same amount of consideration. In today’s market no one is trying to buy, everyone is trying to sell.
Q: Aside from the properties of the asset, what are the characteristics that AuRico Gold takes into consideration before acquiring an asset?
SP: One of the items we would look at is the strength of the operating team. We have been fortunate to have high quality teams at both our mines and this is a key criterion we consider during our evaluation. We look at other things as well, such as existing infrastructure, proximity to a trained workforce, access to local suppliers, and existing relations with local communities, in order to make our assessment.
Q: What role does Mexico play in the portfolio of AuRico Gold, a Canadian company with mining projects in both Canada and Mexico?
SP: Young-Davidson in Ontario, is our biggest mine and represents about two thirds of our production profile. In Mexico we have El Chanate mine, which represents the other third. Mexico is very important from a production point of view: El Chanate is fully built and we expect it to have up to 10 years of profitable production. El Chanate is a simple open pit heap leach operation and it has a very low stripping ratio, which means that we do not have to use a large amount of materials in order to draw a good amount of gold out of it. El Chanate has a very good operating cash cost per ounce: we expect to be producing at an average of just less than US$600 per ounce this year, which still offers a good profit margin taking into account the current gold price. Based on what we have seen today, the mine will still be producing gold in 2024. El Chanate has great exploration potential and we want to grow our operation organically. Our shareholders prefer this type of growth because, with the great cash balance that we have, shareholders know that we will be disciplined. Outside of that mine we are focusing seriously on exploration in Mexico. There is a lot of potential here, and we have a lot of expertise and specialized personnel in Mexico that we can leverage in order to access that potential.
Q: What efforts is AuRico Gold making to constantly improve its safety performance?
SP: We are constantly rolling out leadership training in safety. I would call it courageous leadership training, because at the heart of the concept is the idea that everyone who is a part of the organization is a leader when it comes to safety, and each and every person in our company is responsible for each and every person’s safety. It does not matter if you are the CEO or you are the person who takes care of mine site cleanliness, you are responsible for everyone. Our core value when it comes to safety is ‘Home safe, everyday’, and that is a concept that we are trying to ingrain in everyone who works for us. Our staff go through many safety inductions and training; before anyone starts any new activity or project they have to go through a five point safety system, which identifies the hazards and how they are being mitigated, and ensures that they have discussed the activity with their inspectors or supervisors. The company holds itself to the highest international standards, and our aim is to have zero accidents. If we have just one safety incident it affects the compensation of everyone in the company; we have a zero tolerance approach.
Q: What do you expect to be the role of Mexico in the global gold mining industry, and in the development strategy of AuRico Gold, in the coming years?
LC: Despite the current difficulties in the market and the lower price cycle, we are seeing a lot of companies coming to and investing in Mexico. These are mainly Canadian companies, but there are more Australian companies starting to come into Mexico as well. The assumption has long existed that Mexico is underexplored, and this holds true. This is partly because Mexico still lacks infrastructure – areas of the country are still highly isolated, and mining companies will always start with the more accessible areas and go to the more difficult to reach places last. The information being generated by the Mexican Geological Survey (SGM) and other bodies like it will also encourage more mining activity in Mexico.
Mexico remains at the top of our list – there are many opportunities for new discoveries here. Under President Peña Nieto there will be greater investment in infrastructure, and that will open up more and more of the country for mining in the near future. On the other hand, we still have the very old problem of surface land access; the problem is that nobody has been willing to put together the Agrarian Law and Mining Law in order to make an integrated set of surface land regulations that work. 60% of land in Mexico is ejido land, and if companies do not have good negotiating abilities they will have to spend a lot of money in order to access the land. We see a lot of problems emerging from this issue in Mexico.