New Gold Inc. (NGD) Executive Chairman Randall Oliphant, who helped build Barrick Gold Corp. into the world’s largest producer of the precious metal, says he prefers running a smaller gold miner than a big one.
Companies that produce fewer than 2 million ounces annually have more opportunities to increase output, said Oliphant, who was chief executive officer of Toronto-based Barrick from 1999 to 2003 and joined Vancouver-based New Gold six years later. It’s “very challenging” to expand a large, established gold company, he said.
“You’ve got no growth in total in the industry and a lot of your mines are aging and closing down, so you have to work very hard just to stay even,” Oliphant said in a Nov. 2 interview at Bloomberg’s Toronto office. “They have to continue to go after the Wal-Marts as opposed to the 7-Elevens.”
Recent data show investors support the smaller-is-better thesis. A Bloomberg Industries index of 20 so-called mid-tier gold miners, which includes New Gold, rose 1.3 percent in the past three years through yesterday, compared with a 19 percent decline in a gauge of 14 seniors. In the same period, New Gold has climbed 154 percent in Toronto, while Barrick slumped 18 percent.
Intermediates “offer more upside,” said Craig West, a Toronto-based analyst at GMP Securities Ltd. who rates New Gold a buy.
“Barrick isn’t going to grow by 50 percent in the next three years,” West said yesterday by phone. “I can name eight different juniors that will, so why buy the seniors?”
Andy Lloyd, a Barrick spokesman, didn’t respond to phone calls and an e-mail seeking comment.
Barrick CEO Jamie Sokalsky said in July the company will focus on returns and cash flow, instead of just growing output. Returns will drive production, not the other way around, he said Nov. 1.
New Gold plans to increase gold output from about 400,000 ounces this year to more than 1 million by 2017 as new mines in Canada and Chile start up, Oliphant said. In comparison, Barrick forecasts gold production will be 7.3 million to 7.5 million ounces this year and about 8 million by 2016, while Newmont Mining Corp. (NEM), the second-largest producer, projects 5 million to 5.1 million ounces this year.
“We don’t think that anybody in the gold space is going to be producing 2 1/2 times as much gold five years from now as they are this year,” Oliphant said.
Oliphant said he’s going against the prevailing trends in the mining industry. While bigger producers are cautious about dealmaking following a series of unpopular transactions, New Gold is looking for acquisitions after metal exploration and development companies’ market values slumped in the past two years, said Oliphant, 53.
And while the world’s largest mining companies, including BHP Billiton Ltd. (BHP) and Rio Tinto Group, curtail project spending, Oliphant said New Gold may benefit by moving against that trend.
“There hasn’t been a better time to build a mine, we don’t think, over the next few years, as the whole rest of the world is running in the opposite direction,” Oliphant said.
To be sure, New Gold’s rapid growth plans probably mean it will eventually start closing in on the larger producers. The end game may be to sell the company to a bigger miner, Oliphant said. New Gold has had “soft approaches” in the past, he said.
For now, the company has “lots of runway” to grow, Oliphant said. “I think we can keep doing what we’ve been doing for quite a while.”
Oliphant was a chartered accountant at Coopers & Lybrand LLP before he joined Barrick (ABX) as assistant treasurer in 1987. At Barrick, he had plans to build four new mines over five years to boost output and surpass Newmont as the world’s biggest producer. Oliphant was fired from Barrick in February 2003 after the company’s stock fell 17 percent in the previous 12 months even as the price of gold surged to a six-year high.
New Gold began to take its current shape when it acquired Metallica Resources Inc. and Peak Gold Ltd. in 2008. The combined company bought Western Goldfields Inc. a year later -- bringing in Oliphant -- and bought Richfield Ventures Corp. in 2011. New Gold now produces bullion in the U.S., Mexico, Canada and Australia.
The company’s mines aren’t “top, top quality assets,” GMP’s West said. “But they run them very well, they run them conservatively and they hit their numbers, and that’s all that really matters in this marketplace.”
New Gold has risen 34 percent in Toronto since closing the Metallica and Peak Gold deals, compared with a 5.8 percent decline in the 56-member S&P/TSX Global Gold Sector Index. (SPTSGD) New Gold’s shares fell 3.1 percent to close at C$10.70 today.
New Gold has “a very good management team,” John Stephenson, a portfolio manager at First Asset Investment Management Inc. in Toronto, said yesterday in a phone interview.
“They haven’t done anything stupid,” said Stephenson, who helps manage about $2.7 billion, including New Gold shares. “They’re not likely to go out and blow themselves up by buying an enormous name that people have heard of at a ridiculously high multiple just to do a deal. Their discipline so far has been excellent.”
New Gold paid about C$385.7 million ($385.2 million), a 47 percent premium, to acquire Richfield and its Blackwater project in British Columbia in June last year. The company said the project, which will be the company’s flagship, will produce more than 500,000 ounces of gold and 2 million ounces of silver annually in the first 15 years and will cost about $1.8 billion. The company is targeting first production in 2017, Oliphant said.
The acquisition made sense because New Gold has just finished permitting and developing another gold project, New Afton, in British Columbia, he said.
Oliphant said last week he was looking for acquisitions that met certain criteria.
“If we can find something as compelling as Blackwater, where we are the logical owner and it’s something that we can fund internally that was in one of the jurisdictions that we operate in, then we are quite willing to step forward and do that.”
New Gold said yesterday it issued $500 million of 10-year bonds to raise money for “general corporate purposes.”
“There isn’t an obvious need for additional financing,” Steven Green, an analyst at TD Securities Inc. in Toronto, said in a note. “The market is likely to speculate that they are preparing for a potential bolt-on acquisition to add growth between now and 2017 when Blackwater is expected to come on line.”
How big is too big? Oliphant said that once companies surpass annual gold output of about 2 million ounces, they begin to jeopardize the growth and returns that shareholders expect.
Large companies lose “the magic that is behind some of these more entrepreneurial companies,” Oliphant said.
“New Gold today is probably truer to the Barrick I joined than Barrick is today,” he said. “We don’t really want to be a big company.”
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