'This predictable cycle of investors returning' — Orla spends $850 million on Ontario gold mine

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The gold mining industry could be getting a shot in the arm by near-record high gold prices, currently around US$2,604 per ounce.

Vancouver-based Orla Mining Ltd. on Monday announced an $850-million deal to buy the Musselwhite mine in northern Ontario from Colorado-based Newmont Mining Corp.

Purchasing the mine for $810 million in cash, plus an additional $40 million in gold price-linked contingencies, will help position the company to produce more than 300,000 ounces of gold next year.

Orla chief executive Jason Simpson said he thinks investors are still overlooking the gold mining industry in favour of the returns being generated by Big Tech and other sectors, but he thinks gold miners are on the precipice of an inflow of investment given current gold prices.

“The company was started six years ago in anticipation of this predictable cycle of investors returning to the precious metals space,” he said, “and we’re beginning to see it happen now.”

Gold’s price has fallen 6.6 per cent in the past month, but is still up 29.4 per cent over the past year.

By some measures, the gold mining sector is barely keeping up with those gains. For example, the VanEck Gold Miners exchange-traded fund, which holds shares in the largest gold mining companies and is intended to track the performance of the sector, is up 28 per cent in the past year, to US$36.55 per share from US$28.51.

But investors may be seeking more from gold miners, given that investing in a miner carries more risk than investing in gold.

Ryan McIntyre, managing partner at Sprott Inc., an asset management firm focused on precious metals and critical materials, said gold miners’ profits are expected to increase as gold’s price rises, but that hasn’t really happened yet. As a result, investing activity in the mining sector has been quieter than expected.

“Either people aren’t looking for gold mine exposure or they don’t trust that margin expansion will come to fruition,” he said.

McIntyre said there are signs that the drivers behind rising gold prices have shifted in recent months.

This past spring, China’s central bank purchases of bullion cooled off following more than three years of elevated purchases by it and other central banks. That elevated purchasing is generally traced to the immediate aftermath of Russia’s invasion of Ukraine in February 2021.

Around the same time that central bank purchases of gold started cooling, western investors started increasing their exposure to gold by piling into ETFs that acquire physical gold.

“People are really demanding things that are more independent (from the U.S. dollar),” McIntyre said. “That’s just a thematic that’s going to continue.”

Orla is projecting Musselwhite will generate an average of $150 million in free cash flow per year for the next six years. Located about 500 miles north of Thunder Bay, Ont., Musselwhite has been in production for 25 years.

The miner is also projecting lower all-in sustaining costs of US$1,269 per ounce per year on average, which is lower than what Newmont has achieved. In February, Newmont projected all-in sustaining costs at Musselwhite of US$1,620 per ounce.

Simpson said the lower cost reflects that his company is smaller than Newmont — the world’s largest gold miner — and faces a different cost structure. It will also be the beneficiary of capital investments that Newmont made in the conveyor system and ventilation of the mine.

“This jurisdiction and this asset are very well known to us,” he said.

• Email: gfriedman@postmedia.com

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