How Smaller Canadian Gold Miners Are Thriving Despite Today’s Gloomy Price Environment

Deep underground in Kirkland Lake, 300 kilometres north of Sudbury, it is hard to think about the rich veins of gold near at hand. The heat and humidity overpower everything else.

Crews are currently working 5,400 to 5,600 feet below surface, making it one of Canada’s deepest gold mines. And in this part of the world and at these depths, a first-time visitor would find the temperature suffocating.

Prices are sinking. Mines are bleeding cash. Management teams are frantically trying to decide what to do.

Work crews start dripping with sweat almost as soon as they step out from the shaft underground to begin their shift. Mining this far down is technically challenging and not for the faint of heart. But more than 100 years after the first shaft was sunk in this sturdy Northern Ontario community, it looks as attractive as ever — even if it is surrounded by an environment of gloomy gold prices.

The Kirkland Lake operation, known as Macassa, is one of the world’s richest gold mines by any measure — the data service IntelligenceMine ranks it second overall. The mine’s owner, Kirkland Lake Gold Inc., likes to say that of the world’s 10 highest-grade operations, this is the only significant one that isn’t owned by a major company. Some mines are profitable with a reserve grade of one or two grams of gold per tonne of ore; at Macassa, it is over 19 grams.

This is the kind of high-quality operation that was built to withstand even the worst bear market in gold. Yet until recently, there were real fears that Kirkland Lake Gold was never going to make serious money. The company was bleeding cash from this operation in 2012 and 2013, and that was when gold was above US$1,500 an ounce. If investors knew at the time that the precious metal was going to plunge to US$1,100, they may have viewed this company as a lost cause.

But Kirkland Lake Gold righted itself and is now thriving amid a much weaker gold price. And it isn’t alone. Other small and medium-sized Canadian gold producers in the region, such as Detour Gold Corp., Lake Shore Gold Corp., Claude Resources Inc. and Richmont Mines Inc., have staged impressive turnarounds after being left for dead by many investors two years ago.

They have benefited from the weak Canadian dollar, of course, but have also made major operational improvements. They had to re-align their businesses to be successful in a low-price environment, and they have quieted a lot of doubters by doing just that.

These companies didn’t turn things around through ruthless cost cuts or by starving their operations of capital, as so many others in the industry have done. Instead, they raised money where necessary and invested it wisely. It shows there is a roadmap to success in the current gold market that involves more than hacking and slashing.

When the price for any commodity drops, the conventional wisdom is that investors should stick with large-cap miners with a broad base of operations. These companies supposedly carry less risk. But in the current gold bear market, that theory has been smashed to bits. The senior producers such as Barrick Gold Corp. and Newmont Mining Corp., which are burdened with large debts and unnecessary assets, have been disasters for shareholders. The smaller, nimbler firms like Kirkland Lake have been the winners.

“We’ve all put in optimization plans and turned our operations around,” said George Ogilvie, Kirkland Lake Gold’s chief executive. “Which was timely to say the least.”

Kirkland Lake Gold was founded by Harry Dobson, a Scottish mining entrepreneur who made his fortune buying neglected assets on the cheap and revitalizing them. In 2001, he bought five past-producing mines in Kirkland Lake (including Macassa) for the laughable price of $5 million.

It didn’t seem quite so absurd at the time. Gold prices were mired below US$300 an ounce, so it was tough for any mine to make money. And Kinross Gold Corp., the former owner of the Kirkland Lake operations, was troubled by underground seismic issues. Rather than spend significant capital to fix the problems, Kinross elected to walk away and let the mine flood.

Dobson’s acquisition soon looked brilliant as gold prices began a steady march to their peak of US$1,900 an ounce in 2011. Kirkland Lake Gold made a new discovery at Macassa (called the South Mine Complex) and sailed on the rising tide for years. Until things started to go dramatically wrong.

When gold prices were headed only upward, the mantra in the industry was all about growing production. Too many people began to think gold would keep going up for years, even decades, on end, and investors rewarded companies that built up, even if the new production was higher-cost and lower-grade. Managers were given bonuses for linked to the tonnes of ore they could dig. Quantity mattered, regardless of quality.

Kirkland Lake Gold was eager to expand output from Macassa. It decided to invest $100 million to upgrade the infrastructure so that an operation that was then producing 800 tonnes of ore per day could ramp up to more than 2,000 tonnes.

But as the mine quickly grew larger, Kirkland Lake Gold found the grade was falling at roughly the same pace, which meant productivity was barely improving. More tonnes required more people, driving costs up.

“We were taking tonnes for the sake of tonnes to feed this hungry shaft and feed this hungry mill that we’d invested $100 million in,” Ogilvie said.

Then in 2012, gold prices set off on their long fall, and the company could only lose money quarter after quarter. Kirkland Lake Gold ended up having to issue more than $100 million of convertible debentures and sell a royalty just to right itself.

“Because there was a focus on quantity as opposed to quality, we lost our focus on good mining practices and minimizing dilution,” Ogilvie said.

Dobson knew a different direction was needed, and in November 2013, he brought in Ogilvie, a fellow Scot, as CEO. Ogilvie was previously working in Newfoundland for a different Dobson company called Rambler Metals & Mining PLC.

At Kirkland Lake he employed a “back to basics” strategy. Playing to the Kirkland Lake camp’s biggest advantage, he put the focus back on digging out high-grade ore, rather than hauling out as many tonnes as possible. He tweaked the employee bonus program so that it was no longer based on the number of tonnes being mined, and recruited geologists to ensure better inspection of the ore. Before long, grades increased 30 to 40 per cent. And with a lower tonnage of rock being displaced, the company was able to cut its headcount and reduce labour costs by about 25 per cent.

Now Ogilvie sees an opportunity to make serious money because the grade at the South Mine Complex seems only to get better as the company goes deeper. At the current 5,400-foot level the company is mining at, the reserve grade is 0.61 ounces per tonne. Another 200 feet further down, that grade goes to 0.77 ounces per tonne, and it rises above one ounce per tonne at the 5,800-foot level.

“Just running at the same efficiencies, the margins are going to significantly improve,” he said.

While Kirkland Lake Gold’s turnaround came from a new mining strategy, the gold slump has forced other Ontario miners to quickly find ways to fix their own longstanding problems.

Not too long ago, Detour Gold, which developed a giant open pit northeast of Cochrane, Ont. was an industry superstar — its stock price rocketing from virtually nothing to nearly $40 a share in less than five years. But it fell on hard times in 2013 as it struggled to open up the pit and mine the loose rock on top. And there were the breakdowns at the mill.

“There’s no doubt many of the people who have been around since we started construction and commissioning have a lot more grey hair than they did when we started,” said Detour CEO Paul Martin.

The company found itself short of cash and had to return to the market repeatedly between 2012 and 2015, issuing more than $1 billion of equity and debt and diluting its shareholders. The stock plunged below $4, a stunning collapse from its highs, far outpacing the drop in the gold price. Gerald Panneton, Detour’s outspoken founder and former CEO, resigned in late 2013.
Peter Koven/National Post

But all those equity offerings ended up being worth the anguish, as the mine is finally working exactly as Detour always thought it would. Recent operating results have blown through expectations, with production topping 125,000 ounces in the second quarter.

Lake Shore Gold, meanwhile, was celebrated back in 2010 for making new discoveries in Timmins, Ont. that helped revive a mining camp more than a century old. But within a couple of years, problems were becoming apparent. Grades were weaker than expected, and Lake Shore realized it needed to get to know its deposit better. Like Kirkland Lake and Detour, it repeatedly had to go to the markets for more money, which it used to conduct the drilling and development work needed to expand production.

“If we stayed at low production rates and didn’t invest capital, we never would have made money,” Lake Shore CEO Tony Makuch said.

“There was a point of inflection around 2,700 tonnes (or ore) per day where suddenly our costs were coming down (and) our productivity was going up.”

Jon Case, a portfolio manager at Sentry Investments, said many shareholders probably thought Lake Shore had one of those mines that just keeps sucking up capital and never pays off. “But they seem to have finally gotten to a point where the operation is generating quite a bit of cash, and they’ve been pretty prudent paying down debt with that cash,” he said.

While investors have praised these companies for their operational improvements, arguably a major reason they’ve found a way to prosper is one entirely out of their control: the Canadian dollar.

The U.S.-dollar gold price has performed poorly since the start of 2014, dropping more than nine per cent. But for mining companies, what matters just as much as price is where the gold’s being mined. Thanks to the steep decline in the loonie, the Canadian-dollar gold price is up in the same period that the U.S. price is down. In its last fiscal year, Kirkland Lake Gold’s realized price on its gold sales was $1,412 (Canadian); in its most recent quarter, it was $1,498. More than 90 per cent of these companies’ costs are in Canadian dollars, which shields them from a stronger greenback.

Of course, gold mining is the business of unexpected problems, and all these firms are almost certain to encounter new ones in the months and years ahead. But while the dismal price environment has left even international majors struggling — gold consultancy Metals Focus conservatively estimated this summer that 25 per cent of global gold production loses money at US$1,100 an ounce — these small, spry independents have shown that their own models can still thrive. And that when it comes to gold mining, Canada is a lucky place to be.

The only tragedy is that it took a plummeting gold price to get them straight, when they could have been that much more profitable years ago.