Sprotts view24 Mar 2019 13:19
M&A on the Rise as Gold Miners Consolidate
We also believe that we have entered a new mergers and acquisitions (M&A) cycle. Since 2000, there have been nearly 1,500 acquisitions in the precious metals industry. 2019 alone has seen the industry’s biggest players making headlines for mergers and new ventures.
Gold mining is one of the only industries we can think of with a “negative survivorship bias.” Unlike most industries, the most senior gold miners are not necessarily the competitors with the brightest or safest prospects. It is extremely difficult for gold miners to replace their mined reserves on an annual basis, for the simple fact that gold appears in the earth’s crust at only 4-or-so-parts-per-billion. Therefore, in order to avoid being priced as depleting-resource assets, senior gold miners are generally forced to acquire emerging producers to supplement dwindling proprietary discoveries. After 12 straight years of rising gold prices through 2012, gold’s 45% decline through December 2018 exposed an inordinate number of poor development and acquisition decisions across the industry. Now that legacy write-offs have been taken and capital discipline has been reinvigorated, the most senior gold miners are on stronger footing to take the next step towards industry rationalization.
Figure 2: Number of Acquisitions vs. Gold Price (2000-2017)
Source: S&P Global Intelligence, Bloomberg.
Late last year, industry maverick Mark Bristow engineered what amounts to a reverse-takeover of larger Barrick Gold by the far more efficiently managed Randgold Resources. Given Mr. Bristow’s legendary discipline in converting EBITDA to free cash flow, we expect the Randgold/Barrick merger to catalyze significant reorganization and right-sizing of Barrick’s far-flung assets. Following Mr. Bristow’s lead, Newmont responded within months to Randgold’s throwing of the gauntlet with an equally surprising bid for industry behemoth Goldcorp. In recent weeks, Barrick and Newmont have agreed to an innovative and far-reaching joint venture to extract synergies from joint operation of the two companies’ sprawling Nevada assets. While it is still too early to predict how industry dynamics will ultimately shake out, it certainly appears that the starting gun has been fired on long-overdue consolidation in the gold mining space.
It is our expectation that high-quality producers just below the top-tier of industry capitalization will be the ultimate beneficiaries of intelligent rationalization of the gold mining industry. As seniors shed and trade their non-core assets, we anticipate subsequent balance sheet liquidity to be deployed in competitive bidding for the most attractive mid-tier and emerging producers — precisely the tranche of the gold-mining industry we favor at Sprott.
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