‘I’d rather be the hunter than the hunted,” says Tye Burt, who runs Kinross Gold Corp.
Curious comment given that it came on the very day Kinross announced a bought deal to raise as much as $415-million (U.S.), which would bring its cash hoard to nearly $1-billion. That’s kind of like walking into a meet market in a miniskirt insisting that you don’t like attention. A billion idle bucks is a lot of lipstick. Hunters notice.
Mr. Burt acknowledges that Kinross doesn’t need the money but wants to take advantage of the fact that junior companies can’t raise any money and are ripe for the picking.
Not to pick on Kinross – almost all the sizable gold companies are raising money or will – but this is the problem with the gold mining industry: It produces more share certificates than bullion.
Granted, gold mining is a hysterically brutal industry. Those beautiful, shiny gold bars you see in annual reports belie the sweat, blood and tears that go into wresting that metal from the ground. Still, it can be done in a way that creates value, but I don’t think you do that by hosing out shares every time your multiple gets high enough to ring the bell. Kinross’s is a rich 34 times earnings, or 25 if you look ahead a year.
Even investment bankers seem to agree: As one of them told The Globe, referring to gold issuers, “everybody is going to come to the trough.” Well put.
After all, besides potentially (if not most probably) diluting your investors, what does selling stock say to the world? If gold is going higher, won’t your cash flow? Why not rely on that to make acquisitions?
Maybe Kinross et al will create value but they’re handicapped by their predilection for financial engineering as opposed to mining engineering. There are exceptions to this rule, though. Take a little company called Wesdome Gold Mines. Chances are you’ve never heard of it even though it operates 17 per cent of the underground gold mines in Canada. That’s two of 12, and truth be told, they are probably the two smallest – Wesdome’s production is running at about 80,000 ounces annually. The market capitalization is a mere $104-million.
But it is making real money. Two weeks ago, Wesdome sold gold for $1,008 (Canadian) an ounce. Last week, it sold production for $1,107 an ounce. Every $10 change means about a penny of earnings per share. On a share price of a buck, that counts. It’s nice that gold is rising while the Canadian dollar falls.
But it’s also nice that the company’s share count hasn’t ballooned over the years. In fact, Wesdome has bought back some shares, cleverly at that: The company issued flow-through shares above market last year and, using free cash flow, repurchased the same number in the market under a normal course issuer bid, basically executing an arbitrage and netting $400,000 of free money.
One of Wesdome’s mines, called Kiena, is in the Val d’Or region of Quebec, the other, Eagle River, is in Northern Ontario. Both have short lives as things stand but they also have interesting prospects and are spinning off cash.
Here’s what I like most about Wesdome, though, and it has nothing to do with numbers or ratios. Over dinner with two of the senior executives the other day, I asked them what keeps them up at night. The answer to that question is typically a worry about something. The answer this time was immediate and mutual: Their high hopes for a new zone at Kiena that, if all works out, could substantially increase the mine life and the value of the business (both have substantial amounts of their wealth in Wesdome shares).
Wesdome is a tiny player. It deserves to trade at a discount to its bigger rivals. But that discount looks too high.
Fabrice Taylor is a chartered financial analyst.
In a recent column on Gildan Activewear, I said the company recently changed the way it presents its cash flow in its public documents. This may have caused some confusion. The company’s disclosure is transparent, however it does highlight some of its cash flow figures differently compared to last year.