The Great Gold Consolidation

By January 14, 2019Markets
The Hutch Report

It seems that the merger activity amongst gold miners is continuing. On Monday, January 14, 2019, gold miner Newmont Mining said that it would buy smaller rival Goldcorp in a deal valued at $10 billion. Newmont will offer 0.3280 of its share and $0.02 for each Goldcorp share. According to the company’s statement, the combined company’s reserves and resources will represent the largest in the gold sector and will be located in favourable mining jurisdictions in the Americas, Australia, and Ghana.

The latest merger falls on the heels of last year’s mega merger between Barrick Gold and Randgold Resources. Trading in the shares of the new company started at the opening of business on the New York and Toronto Stock Exchanges January 2. The new company is still known as Barrick but its trading symbol on the NYSE has been changed to GOLD, the ticker formerly held by Randgold on NASDAQ. On the TSX, the ticker remains ABX.

The merger created a gold company which now owns five of the industry’s Top 10 Tier One gold assets1 (Cortez and Goldstrike in Nevada, USA (100%); Kibali in DRC (45%); Loulo-Gounkoto in Mali (80%); and Pueblo Viejo in Dominican Republic (60%), and two with the potential to become Tier One gold assets (Goldrush/Fourmile (100%) and Turquoise Ridge (75%), both in the USA). 

Overshadowed by the Barrick merger was the acquisition of Beadell Resources and its Tusan Gold mine in Brazil by Great Panther Silver. In a telephone interview with Kitco News, Jim Bannantine, president and CEO of Great Panther Silver (NYSE: GPL, TSX: GPR), said that he thinks investors are only seeing the start to more mergers within the mining space as companies are beginning to take advantage of low valuations in the marketplace.

According to a new report by Fitch Solutions, Gold miners are expected to remain committed to cutting costs and capping expenditures in 2019. Gold prices are predicted to average $1,300/oz and it is believed that most major miners’ cash costs of production should remain comfortably below $900/tonne. The largest firms are expected to remain committed to spending cuts in order to reduce debt loads, and continue to follow a strategy of improving both operational and cost performance. Fitch also stated that, “Capital expenditure estimates for 2019 indicate that although gold companies may have turned a financial corner in 2016, spending will not return to the heights of the past decade. As such, priority will be given to reinvestment in brownfield assets rather than the development of greenfield projects.”

Following the Barrick – Randgold merger (completed in January 2019), and now the Newmont – Goldcorp merger, we should expect more M&A activity to filter through the industry in addition to and increase in joint ventures as a strategy to reduce risk, especially in unstable countries. An example of notable joint venture activity in 2018 include Gold Fields & Asanko Gold’s 50/50 deal in the Nkran and Esaase gold deposits in Ghana and Indiana Resources and Cradle Arc’s 65/35 deal in the Kossanto West Gold project in Western Mali.

Not surprisingly, as an added measure to further reduce risk in these volatile areas, miners are expected to invest in blockchain technology. According to Fitch, such a system would allow them to effectively track the sourcing of minerals across the supply chain in order ensure they abide by ethical and sustainability standards.

Gold prices have been consolidating since the previous move up in 2016. If the price of gold moves up above the resistance level of $1,400 it could help propel the miners who have gained the greatest operating efficiencies. 

Previous to today’s takeover of Goldcorp by Newmont, articles of the past few years were focused on who Goldcorp would takeover, disregarding Goldcorp as the target. So now in light of that, the question is, “Who is the next prime takeover target?” The top 10 in the industry according to current market capitalisation levels are now Barrick Gold, Newmont Mining, Franco-Nevada, Agnico Eagle, Kirkland Lake, Royal Gold, AngloGold Ashanti, Kinross Gold, Goldfields and B2Gold. Will we see consolidation amongst the 10 largest as we have just witnessed or are the juniors ripe to be taken over? Either way, the current consolidation activity should create some strong valuation plays for the future should the price of gold finally make its move upward. 

Kirkland Gold has broken away from the pack.