Small, medium, large. In the world of mining, the size of a firm strongly dictates its success. An environment of high prices plays to those at the extremes, with the big players taking a slice of operations across the world, and the small, more focused firms capitalizing where the payoff is most pronounced. Prior to the more than three years of decline that the sector has suffered up to now, that was how things stood – the Barrick Golds at the top and the Gold Canyons at the bottom, outdoing those in the middle.

Today, though, the balance of power appears to have swung in favour of those occupying the middle ground. In the eyes of Bill Beamen, chief executive of Northern Star, firms like his are the ‘Goldilocks’ of the gold mining industry, unencumbered by debt and able to access capital. So just how do the fortunes differ among those occupying the three tiers of the industry?

Those at the top are too heavy on debt

When prices are high, it pays to put weight on. Few companies illustrate this better than Barrick Gold. Between its founding year of 1986 and 1994, it hoovered up assets across North and South America to become the world’s third largest gold miner. By 2001, through the takeovers of Arequipa Resources, Sutton Resources and, most notably, Homestake Mining Company, thanks to $2.3bn stock offering, it had taken second place. Five years later, its success in pulling off a $9.2bn takeover of Placer Dome saw it take top spot. It profited like no other in the prolonged period of high prices, and continued to grow due to favorable financing options.

But when prices dropped, the weight that had once been an asset fast became a burden. Three years into a gold mining downturn, the world’s largest operator finds itself slow and cumbersome.

On 19 February 2015, it revealed net debts valuing $10.4bn and a net loss for the year of $2.85bn. In an attempt to appease the concerns of the market, it announced that it will sell its Porgera mine in Papua New Guinea and Cowal mine in Australia to help cut the debt by $3bn within a year.

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The Japan-Australia Economic Partnership Agreement has been hailed as a landmark trade liberator.

Announcing the plans, John Thornton, who took over as chairman of Barrick Gold in April 2014, stressed the need for the company to return to its roots. "In its early years, Barrick was lean and nimble, with minimal bureaucracy. Over the last year, Barrick has been returning to this partnership culture and the operating model that made it so successful."

Since Thornton announced this slimmed down vision of Barrick, the company has made further moves, announcing that it is willing to part with one of its most prized assets. In mid-March of this year, it revealed that it would be willing to listen to offers for the Zaldivar mine in Chile, with analysts suggesting a sale could bring in more than $1.5bn.

Those at the bottom are too light on cash

While those at the top must make big strides in reshaping operations and offloading assets in order to avoid an overburdening debt, those at the other end of the market must tread carefully to hold on to what they have. Characterized as specialists, with narrow focus in both material and geographical terms, the small-cap mining firms’ inability to prosper is driven by a lack of capital, not overwhelming debt.

Focused almost entirely on Northern Ontario, Gold Canyon Resources holds ownership of 5.1 million ounces of gold and 26 million ounces of silver from its assets.

With such concentrated interests, slimming down and refocusing is just not an option, so it must try to ride out the storm. In response to the low prices, it has, like many other small-caps, elected to down tools, reducing headcount to a minimum and shutting down operations while renting out unused equipment to those still operating for revenues. Using this strategy, the likes of Canyon have defied the predicted bankruptcies by treading water.

"We have the means to keep weathering this storm."

Ron Schmitz, a director at Gold Canyon, explained that since prices plummeted in 2012, Gold Canyon has been forced to "cut to the core" and has been transformed from a company with a workforce of more than 60 down to an operation encompassing just "a couple of guys". In its latest statement to investors, the company announced that it had raised $1.31m to enable it to continue collecting data on prospective operations but that its skeleton operations would continue.

Giving his overview, Akiko Levinson, president, CEO and director of Gold Canyon, said: "We continued to reduce overhead costs over the latter part of 2014. Although the downturn in the mining sector has been sharp, we have the means to keep weathering this storm and be able to look at various options we may have to move forward."

Those in the middle are just right

In between the debt heavy global firms and the cash-starved small-tier firms, are the mid-cap firms, and for them, the current environment is perfect. With the likes of Barrick Gold and Newmont Mining desperately selling off assets to reduce debt levels, Northern Star Resources pounced on the opportunity to buy up assets at a favourable price, picking up $166m worth of mines since the slump of 2013.

Since that buying spree began, the Sydney-listed firm has seen its valuation rocket to AUS$1.2bn and its recent results reported a profit increase of 573% after bringing the newly acquired assets online. Outlining the benefits of being neither weighed down by or starved of cash, Bill Beamen, chief executive of Northern Star, said: "It’s a pretty simple strategy. That sweet spot in the middle is companies our size. We are the Goldilocks gold producer."

Explaining the rising value of the mid-cap miners, David Baker, managing partner at Baker Steel Capital Managers, said: "The mid-caps have gone through their rationalisation. They don’t have the debt, have got some reasonable growth and have learned to survive on their own two feet. There’s a whole realm of quite interesting companies, particularly in Australia."

Australia has a legacy of abandoned mines which are not being rehabilitated.

Making a move for the middle

In the current environment, the mid-caps are undeniably in the best position to prosper when compared to the overweight majors and underweight minors. The likes of Barrick Gold clearly believe this to be the case. Its attempt to slim down and become nimble once again suggests that those at the top are attempting to narrow the gap with the mid-caps. But there is a growing possibility that the best size to be is neither small, medium or large, rather a new entrant with a war chest just waiting to pounce.

A case in point is Mick Davis, having dusted himself off from the fallout over the merger of his former employer Xstrata with Glencore – ‘Mick the Miner’ recently announced that he has gathered a war chest of up $5.6bn in order to enable his private mining venture X2 to buy up the best assets on offer. Following in his stead, Hugh Morgan, the former Western Mining Corporation chief exec, has also re-emerged to confirm his intention to set up a new operation ready to take advantage of low asset prices.

With no debts whatsoever, and the freedom to choose when and where it invests, those from the outside looking in may be even better off than those currently occupying the comfortable middle of the mining sector.

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