CIBC

Question 1

How has Barrick reduced their debt?

Answer 1

Effectively reduced debt:

a. 3.1B in 2015
b. 2B in 2016
c. 1.5B in 2017
d. 1.5B in 2018

Question 2

Benefits of the Randgold deal

Answer 2

The deal creates sustainable profitability and superior scale as compared to Senior Gold Peers:

1) Lowest cash cost position $538/oz
2) Highest adjusted EBITDA margin (48%)
3) Largest reserve base 78Moz
4) Robust annual production 6.5Moz
5) 5/10 of the world’s top Tier One gold assets by total cash cost per ounce
6) 2 Additional Tier One assets
a. Goldrush, formile and TR
7) Positioned for Growth on many of the world’s most prolific gold districts
8) US$18.3Bn aggregate market capitalization

Question 3

How will the new company be divided?

Answer 3

Under the terms of the Merger, each Randgold Shareholder will receive 6.1280 New Barrick Shares for each Randgold Share. Following completion of the Merger, Barrick Shareholders will own approximately 66.6 per cent and Randgold Shareholders will own approximately 33.4 per cent of the New Barrick Group on a fully-diluted basis.

Question 4

Where are Randgold’s assets?

Answer 4

DRC
Mali
Cote D’Ivoire
Senegal

Question 5

Where are B2Gold’s assets?

Answer 5

Mali 
Burkina Faso
Namibia
Philippines
Columbia
Nicaragua
Canada

Question 6

Which mine did B2Gold just opened? Why is this important?

Answer 6

Fekola added 420k – 430k oz of production

Closest largest production is Otjikoto mine in Nambia 165-175k oz and Masbate in the Philipeans

Question 7

What are the key points of B2Gold as an investment case?

Answer 7

Profitability and growth
Strong financial position
Extensive management experience
World-class exploration, construction and operations teams

Question 8

Who is the CEO of B2Gold?

Answer 8

Clive T. Johnson

Question 9

What are the top 5 largest mining companies by revenue?

Answer 9

1) Glencore
2) BHP
3) Rio Tinto
4) China Shenhua Energy
5) Vale

Question 10

Who started Franco-Nevada?

Answer 10

Pierre Lassonde

Question 11

What is an ‘investment bank’?

Answer 11

An investment bank (IB) is a financial intermediary that performs a variety of services. Investment banks specialize in large and complex financial transactions, such as underwriting, acting as an intermediary between a securities issuer and the investing public, facilitating mergers and other corporate reorganizations, and acting as a broker and/or financial advisor for institutional clients. Major investment banks include Barclays, BofA Merrill Lynch, Rothschild , Goldman Sachs, Deutsche Bank, JP Morgan, Morgan Stanley, UBS, Credit Suisse, Citibank and Lazard. Some investment banks specialize in particular industry sectors. Many investment banks also have retail operations that serve small, individual customers.

Question 12

What are the roles of investment banks?

Answer 12

Financial intermediaries
Financial advisors
Mergers and Acquisitions
Research

Question 13

Define how investment banks act as Financial intermediaries

Answer 13

Investment banks help corporations issue new shares of stock in an initial public offeringor follow-on offering. They also help corporations obtain debt financing by finding investors for corporate bonds. The investment bank’s role begins with pre-underwriting counseling and continues after the distribution of securities in the form of advice. The investment bank will also examine the company’s financial statements for accuracy and publish a prospectus that explains the offering to investors before the securities are made available for purchase.

Question 14

Define how investment banks act as financial advisors

Answer 14

As a financial advisor to large institutional investors, the job of an investment bank is to act as a trusted partner that delivers strategic advice on a variety of financial matters. They accomplish this mission by combining a thorough understanding their clients’ objectives, industry and global markets with strategic vision trained to spot and evaluate short- and long-term opportunities and challenges facing their client.

Question 15

Define investment banks role in mergers and acquisitions

Answer 15

Handling mergers and acquisitions is a key element of an investment bank’s work. The main contribution of an investment bank in a merger or acquisition is evaluating the worth of a possible acquisition and helping parties arrive at a fair price. An investment bank also assists in structuring and facilitating the acquisition in order to make the deal go as smoothly as possible.

Question 16

Define the investment banks research division

Answer 16

The research divisions of investment banks review companies and author reports about their prospects, often with “buy”, “hold” or “sell” ratings. While research may not generate revenue itself, the resulting knowledge is used to assist traders and sales. Investment bankers, meanwhile, receive publicity for their clients. Research also provides investment advice to outside clients in the hopes that these clients will take their advice and complete a trade through the trading desk of the bank, which would generate revenue for the bank. Research maintains an investment bank’s institutional knowledge on credit research, fixed income research, macroeconomic research, and quantitative analysis, all of which are used internally and externally to advise clients.

Question 17

How do global investment banking franchises typically structure their Mining & Metals group?

Answer 17

For most global investment banking franchises, metals and mining is a sub-sector of a Basic Materials or Natural Resources (along with oil & gas) coverage group – however, we have chosen to segregate M&M on this website reflecting mining’s prominence in Canadian industry and finance and in-line with Canadian investment banking industry verticals.

Question 18

What are the key commodities to know in the mining space?

Answer 18

Precious metals
Base metals
Rare Earth Metals
Bulk Commodities

Question 19

How do mining companies primarily raise capital?

Answer 19

Mining companies primarily raise capital through issuing equity on an exchange and subsequently investing the money into mines throughout the world, so due to the TSX acting as a magnet for mining companies, corporates with operating mines and core assets in jurisdictions outside of Canada will choose to list in Toronto.

Question 20

How do large cap miners usually position their portfolio to ensure smooth cash flows and preserve dividends?

Answer 20

Large cap miners (BHP/Rio) usually have a diversified enough project base with new projects coming online while others decline to have a more consistent cash flow. These names are very savvy and often recalibrate or rationalize their project portfolios with non-core asset sales to ensure growth and continuity. Treasury at BHP and Rio are also very cognizant of when to issue debt opportunistically to smooth cash flows and preserve dividends.

Question 21

How are economically viable mineral volumes in a mine classified?

Answer 21

Economically viable mineral volume in a mine can be classified as the mine’s resources, and further broken down into measured, indicated and inferred resources.

Question 22

What is very important aspect to factor into the mine’s return?

Answer 22

After operations cease, the company will have an environmental liability and will have to decommission the contaminated mine site. This will factor into the mine’s return.

Question 23

What are two mined ore processing methods?

Answer 23

Ore Mill

Heap Leaching

Question 24

There are two major differences between mining valuation and conventional valuation for run-of-the-mill companies:

Answer 24

1) The discount rate;
2) Zero terminal value.

These two are reflected in the DCF driven valuation metric for miners – Net Asset Value or NAV.

Question 25

In valuating mining companies, what do miners not use? What do they use instead?

Answer 25

Mining companies do not use the Capital Asset Pricing Model that is common for most DCFs – especially gold companies. Mining net present value will use a standard discount rate with a floor discount rate commonly used for the mined commodity plus a risk factor.

Question 26

Define Beta

Answer 26

CAPM = Rf + B(Rf – Rf + Country Risk)

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns.

Question 27

Why is gold the best example for why we use NAV instead of CAPM?

Answer 27

Gold is the best example for why this is used in place of CAPM – the yellow metal has a zero or negative beta due to its role as a safe haven asset. Gold and Platinum Group Metals (PGM) will have a floor discount rate of 5%, which will be adjusted upwards for political risk and stage of development (the difficulty of the geography is already baked into costs of extraction in the projected cash flows). Base or industrial metals (copper, tin and zinc) have the same rule – except the floor is 7 or 8%.

Question 28

To calculate the NAV of a mine, what first must be calculated? Which factors must be considered?

Answer 28

First the Net Present Value (NPV) of each individual mine in the miner’s portfolio needs to be calculated. The NPVs are calculated considering these factors:

Commodity price over the mine life
Development costs
Labour
Fuel
Discount rate

Question 29

How do you value the mining corporation as a whole?

Answer 29

The value of the actual corporate (NAV) is the sum of the mine NPVs (the cash flows multipled by the discount factors for each mining project) and adjusting for other capital structure components. An analyst would sum up the NPV of all the mines in the portfolio, subtract debt and debt-like structures and add cash, the value of the hedge book and investments.

Question 30

Once the NAV is known, which metrics are commonly used for valuation in metals & mining?

Answer 30

Enterprise Value/EBITDA

Price/Net Asset Value

Price to Cash Flow – T+1, T+2

Other valuation metrics include EV/P1 Reserve, EV/P2 Reserve, and EV/Resource.

Question 31

When is EV/EBITDA primarily used?

Answer 31

EV/EBITDA is primarily used for large, stable and diversified miners such as BHP Billiton, Rio Tinto, Glencore and Vale. For these companies, mining project life is well defined and cash flows are relatively predictable. If one mine goes under, this will not have an outsized effect on EBITDA because there are several mines across several commodities being extracted concurrently.

Question 32

Why is EV/EBITDA not necessarily meaningful for junior and intermediate miners?

Answer 32

Additionally, only senior gold producers and large diversified miners can issue corporate level debt, so enterprise value is not necessarily a meaningful figure for junior and intermediate miners. Junior and intermediate miners can sometimes tap into high yield debt markets if they have sufficient size and if debt capital markets are open to them, but usually will need to issue equity or equity-linked notes (convertible bonds, mandatory convertibles). Corporate banks may offer bridge financing between the time when the equity or equity-linked notes are issued and announcement.

Question 33

When is P/NAV more popular?

Answer 33

P/NAV is more popular for miners that focus on one or two commodities – it ascribes value given to each ounce of gold or whatever the relevant unit metric is for the metal. Where the P/NAV multiple trades at is dependent on how de-risked or unrisked the mining asset is (when the next stage is reached, the profits become less uncertain). With each stage of development, the P/NAV multiple will trade higher – from feasibility (preliminary economic assessment, pre-feasibility & feasibility) to construction to production to project expansion.

Question 34

Who has the highest P/NAV and why?

Answer 34

The highest P/NAVs are the royalty companies, with Franco Nevada usually occupying the premier valuation followed by Silver Wheaton. Royalty companies or streamers are perceived by the market to have low operational risk. Depending on how wide and diversified the portfolio is, the streamer will trade at a premium (Franco Nevada vs single commodity Sandstorm Gold). Also, the higher the negotiated net smelter return (NSR), the higher the premium (usually 2% NSR but 3% is possible).

Question 35

When is Price to Cashflow – T+1, T+2 appropriate?

Answer 35

Price/Cash Flow is the second most popular metric for most non-global, diversified miners. Usually Price/Cash Flow is looked at from a one year out and two year out basis. P/CF will also heavily consider the country risk for the miner, as assets in developed nations are more likely to see work stoppages due to labor shortages, strikes and other unforeseen production delays.

Question 36

Define Byproduct vs Coproduct

Answer 36

When primary production is split between two metals, it does not make sense to have byproduct costs with one metal in focus, or breakeven economics will always be positive. For companies such as Silver Standard or Hecla Mining, coproduct costs are used for investment decisions with a blended gold-silver price in the ore.

Question 37

Define gold equivalent production

Answer 37

The company evaluates the amount of byproduct (mostly silver) mined, and the value is divided by the price of gold to give an equivalent number of ounces. Of course, depending on the price of those commodities vs gold, this number fluctuates.

Question 38

What considerations should be looked at that shine light on the creditworthiness before looking at capital structure and where each source of capital falls in pecking order?

Answer 38

Scale
Diversification
Position on cost curve
Consumers
Geography and political environment
Reserves

Question 39

What are the top 3 development and principal risks and uncertainties?

Answer 39

1) Public perception
2) Geopolitical and regulatory
3) Technology and cyber
4) Increased costs / pressure efficiency and effectiveness
5) Macro-economic fluctuations

Question 40

What is the change in revenue, gearing, EBITDA and net debt to EBITDA for the top 40 miners?

Answer 40

Revenue: $600bn up 23%
Gearing: 31% down from 41%
EBITDA: $146bn up 38%
Net debt to EBITDA: improved by 38%

Question 41

What is the operating cost breakdown of the mining industry?

Answer 41

1) Raw material and consumables
2) Employee expenses + external services
3) Government royalties paid / payable
4) Freight and transport
5) Other operating expenses
6) Exploration and evaluation expenditures

Question 42

Discuss how the top 40 have optimized their portfolios?

Answer 42

1) Companies are seeking to optimise their asset portfolio by divesting non-core assets in order to refocus and redeploy capital. For example, Rio Tinto was very successful in monetising its non-core Australian coal assets and becoming the only major in the Top 3 to no longer hold any interest in coal. The total consideration received, which exceeded market expectations, was in excess of $6 billion11.
2) Companies are seeking to increase their existing ownership interests in operating mines – for example, Glencore increasing its ownership interest in Mutanda Mining SARL (to 100 per cent) and the Katanga mine in the Democratic Republic of Congo (both coppercobalt) as well as the Volcan Compañía Minera S.A.A. zinc asset in Peru.
3) Top 40 members are partnering with other majors or mid-tier miners in order to leverage infrastructure, identify operating synergies and/or provide access to finance. For example, in 2017 Barrick Gold entered into agreements with Shandong Gold and Goldcorp, establishing partnerships to operate, develop and explore in Argentina and Chile respectively.