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Higher Prices Help Gold Miners Refocus on Profitability

THOMAS BUTCHER: Ima, I understand that you've had a chance to talk with some gold mining companies. How has their mindset changed in the current environment?

IMARU CASANOVA: Yes, the Gold/Precious Metal Team met with about 20 gold mining companies in the month of May. Meeting with that many companies over a short period of time always gives us an opportunity to assess what's happening in the sector. When we have these meetings, I always ask myself: What is the message? What is the main takeaway? I can tell you that this time, the main message that I believe gold miners are sending is that, yes, companies are still very focused on efficiencies and operating improvements and cost savings. At the same time, with the higher gold prices this year, the conversation has also switched back to what are gold miners doing with the resulting increase in cash flow. The conversation transitioned from preserving cash to, once again, how best to deploy that cash.

BUTCHER: How can gold mining companies deploy this additional cash?

CASANOVA: There are different situations for different companies. For those companies still paying down debt, this will remain the top priority. There are other companies that are building mines. For those companies, the extra cash provides a welcome cushion that is very positive, because until recently the market had significant concern over companies' ability finance these projects. For those companies that have paid dividends in the past many expect dividend payments to be resumed or to be increased in this higher cash flow environment.

For most companies, higher gold prices and higher cash flows means the opportunity to add growth to their pipelines. And because their balance sheets are healthier and costs are under control, companies can once again focus on growth. How can they do that? They can focus on growth through acquisitions. Given that valuations are still relatively low, they can buy assets. Or they can do it organically. In the last couple of years, exploration spending had been reduced significantly by most gold mining companies. Now with higher free cash flow, we expect exploration spending to pick up. When that happens, companies can add more resources, they can upgrade resources to reserves, and they can take the opportunity to make new gold discoveries. Also, the projects that had been shelved in the downturn can now be revisited as more financing becomes available.

BUTCHER: But Ima, with higher gold prices, is there any fear in the market that the miners are going to revert to their old ways, especially growth at any cost?

CASANOVA: I can tell you that despite the higher gold prices and despite the richer cash environment, the management teams we met with are very committed to growing profitability and returns, rather than simply growing production. Several of the companies we met with announced that 'a new ounce of gold is only a good ounce of gold if it improves or at least maintains the per-ounce profitability of the company.' Gold mining companies are starting to change the way that they measure growth. We heard free cash flow per share as the growth metric, rather than just production volumes. This is extremely encouraging to us. And we are starting to see a slow and cautious shift from just surviving to thriving. The key word here is "cautious." Management needs to move cautiously. Gold mining companies still need to remain firmly committed to demonstrating a very rigorous capital allocation strategy that is driven and is focused on value creation for shareholders. We think that if the companies can achieve this, it will put them on the radar not just for a sub-sector of gold, commodity, and natural resource funds, but it will put them on the radar of the broader equity market investable universe.

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