Last year, the activity of mergers and acquisitions (M&A) in the gold industry almost doubled in money terms – to 24.7 billion dollars, although half of that amount – 12.3 billion dollars – came from Newmont-Goldcorp. At the same time, there were 106 transactions, almost the same as in 2018, according to the Metals Focus consulting company in its Gold Focus 2020 report.
There have been two major mergers in the past couple of years: Barrick Gold Corp – Randgold Resources Ltd and Newmont Mining – Goldcorp. But M&A deals will continue, with a low-market cap approaching, but there is a trend towards premium-free deals, analysts and fund managers say.
Portfolio manager VanEck International Investors Gold Fund Joe Fabouterased, told Kitco News that he expects further mergers and acquisitions, especially between small and medium-sized companies. At the same time, he notes that new deals will be mainly “mergers of equals”, in which there is no premium for the acquisition – companies become partners to create a stronger company. Such mergers have happened before, but historically there have always been very few of them.
“Although companies do a thorough asset check before a deal, it is very difficult to know exactly what is being acquired, at least until you start mining. Foster says, “We’ve seen a lot of deals in which companies overpaid for the acquisition.”
According to him, now the companies are making joint efforts to avoid such mistakes, and as a result either refrain from the deal, or end up in a friendly merger on equal terms.
Midas Fund Analyst William Winmill in turn notes that during the recent 10-year bullish period companies took huge loans in order to absorb a colleague, today mergers without premiums are strikingly different and become “safer”. Large and strong companies can attract a broader shareholder base. “There are so-called ‘universal’ investors in the market who like to come to companies of a certain size,” he adds.
A large company could also envision other profit opportunities, Foster said. “You don’t get a big premium right away, but you create value in the long run,” he said. An example of this is the no-premium deal between Barrick and Randgold, and Equinox Gold Corp and Leagold Mining Corp.
“The market saw the benefits of peer-to-peer mergers, and their quotes showed convincingly right after the close,” says Foster. “Of course, in some cases it takes time, but you see your value grow over that time.”
Nevertheless, Winmill admits that sometimes mergers without premiums do not increase shareholder value, but have other – economical and operational benefits: enterprises receive more qualified management teams, reduce infrastructure costs, for example, the joint venture of Barrick and Newmont in Nevada. which allowed the two gold mining giants to optimize costs, including transportation across the state.
“The majors seem to be happy with their organic growth opportunities,” says Foster, and does not expect an uptick in M&A among the largest companies anytime soon.
Nevertheless, the trend may well continue among junior companies, in addition, China is becoming more active in this market, and this will be the main sign of the upcoming M&A cycle, Foster expects.
“In previous cycles we saw North American and Australian companies engaged in mergers and acquisitions with junior colleagues. Chinese partners were always happy to take over some of these companies, but still remained bystanders. And now they have taken action. The rise in gold prices has made them more decisive in taking action, “says Foster of the VanEck International Investors Gold Fund.
In addition to the Chinese, Australians will also be active in this cycle, adds Midas Fund’s Winmill. Australian companies have gotten a taste of acquisitions in other parts of the world after “having real success” in their home jurisdictions – capitalizing on increased production on the strength of the Australian dollar.
Gold Miner Bulletin