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Two mega deals in less than four months have heralded the much talked about consolidation in the global gold sector.
A US$6.5 billion deal was publicised in September 2018 between Barrick and Randgold. More recently, the US$10 billion mega merger between Newmount and Goldcorp was announced, effectively creating the world’s biggest gold producer by output.
This consolidation has been speculated about for the past few years. While this deal could be positive for the gold industry, it will create material uncertainty for the remaining larger producers, as to who is next to be acquired or needs to merge.
Positive market reactions
So far the market reaction has been generally positive to these mega mergers, says Brewer, cautioning however, that it is worth remembering the constant refrain from gold hedge-fund manager, John Paulson who has historically criticised the gold industry for entering into bad deals that destroyed shareholder value.
The continued complaint of investors was that ‘undisciplined growth results in poor returns,’ and has over time caused all gold companies to hold back on development and exploration.
This time around, hopefully these mega mergers create real value over the long term.
A renewed focus on boosting production profiles
Over the past ten years, gold companies have been focused on earnings and cash dividends over exploration. The current mining rates of existing resources are causing net depletion of resources however, and therefore a motivator for these mega mergers is the need to add projects to boost production profiles and simultaneously obtain geographic diversity, particularly from higher risk regions.
From a South African perspective, the recent mergers now move AngloGold Ashanti up to the third largest producer, albeit some way behind the two goliaths, with AngloGold producing in 2017 3.8m ounces, behind Newmont Goldcorp 7.9m ounces and Barrick-Randgold 6.6. Behind these three are Kinross with 2.7m ounces and Newcrest 2.3m ounces.
This contrasts with the situation twenty years ago, when Anglo American created the world’s number one gold miner by merging its South African assets to create AngloGold.
Today, the miner only gets about 15% of its production from South Africa. It’s facing a dying South African gold industry, with its primary South African mine, Mponeng, having to cut costs along with all of its South African peer groups.
The questions are whether AngloGold will dispose of its remaining South African mine and go hunting abroad and complete the final leg of its internationalisation process.
Will it be AngloGold or a Kinross and Newcrest as the new combination, which will provide potentially much needed scale and dual listings?
Mergers versus acquisitions
The alternative to the merger activity currently taking place will be outright acquisitions and cites Vancouver-based B2Gold – with operations in Africa, South America and the Philippines – as a potential target, with its growth profile and operational expertise in West Africa in particular.
At the asset level, a potential bidding war may be appearing over TSX listed junior gold miner SolGold that is undertaking exploration work in Ecuador. With the share price up 30% last year with Newcrest now holding 15% and surprising entrant global mining behemoth BHP holding 11% albeit for the copper deposits.
Consolidation in the gold sector in South Africa may still occur, although the backdrop is less certain.
We’re not only dealing with politics with the upcoming election, strikes on some of the local gold mines, dwindling grades, and output ever deeper in the ground, but there are limited options in the South Africa gold sector as well.
Perennial dealmaker Sibanye-Stillwater will soon be bedding down Lonmin, and after recent strike action may well look offshore after its very successful palladium acquisition in North America. This means it may not be the consolidator in South Africa.
Harmony showed appetite in acquiring a cash positive mine from AngloGold, but may be more focused on its Wafi Gulpu copper gold deposit in Papua New Guinea instead, which, if successfully developed, will be a massive kicker for the group, along with its joint venture partner Newcrest.
This leaves Goldfields, which has clearly demonstrated an appetite for non-South African assets and would be hard pressed to acquire locally while it continues to work on production issues at South Deep to meet its production forecasts.
In fact, the predictions are a possible de-consolidation in South Africa, with the major South African gold producers offloading assets to the second-tier miners and then focus on acquiring offshore.
The overriding caution is that costs will not come down in the South African gold sector, which will make any M&A difficult at current prices, but not insurmountable.
On a global level, M&A will definitely continue, and the more optimal strategy to take by all gold mining groups with M&A supportive balance sheets may be to hold out for some of the disposals that will occur post these mega mergers. Quality assets could be available as the leading groups optimise their portfolios.