Investors Want Australia's Gold Producers to Buy Their U.S. Rivals

(Bloomberg) -- Gold producers in Australia are outperforming their global competitors, prompting investors to encourage them to expand their horizons and acquire struggling North American rivals.

Boosted by some of the sector’s best margins, low debt and swelling cash piles, miners in the world’s No. 2 producer are defying a wider lull in gold equities. Saracen Mineral Holdings Ltd. and Northern Star Resources Ltd. have surged in the past year as rivals in Canada, the U.S. and South Africa faltered.

“Australian gold miners currently enjoy some of the highest margins in the world,” said Stephen Land, San Mateo, California-based portfolio manager at the $1.1 billion Franklin Gold and Precious Metals Fund. The producers are being supported by cuts to operating costs and stronger prices of bullion in Australian dollar terms.

Miners in Australia and New Zealand account for about 20 percent of the Franklin fund’s holdings, which last year added positions in Dacian Gold Ltd. and Gascoyne Resources Ltd. Australian companies are now valued more equitably against North American peers “allowing them to be competitive in global M&A,” Land said.

Investors Want Australia's Gold Producers to Buy Their U.S. Rivals

Newcrest Mining Ltd., Australia’s top producer, invested $250 million in Canada’s Lundin Gold Inc. this year, while St. Barbara Ltd. is examining potential deals that could include the U.S. Evolution Mining Ltd. and Northern Star are among other companies with the firepower to move on poorly performing North American miners in the short-to-medium term, Argonaut Securities Ltd. said in a note last month.

“We will consider adding overseas assets to our Australian portfolio,” Evolution’s Executive Chairman Jake Klein said in an emailed statement. The producer has a “preference for first world jurisdictions and hence North America is on the radar.” Northern Star didn’t immediately respond to a request for comment.

Valuations of Australian producers are on par with North American companies for “the first time in memory,” according to Joe Foster, New York-based portfolio manager for the $675 million VanEck International Investors Gold Fund. Australian and U.S. producers currently trade on a similar price-to-cash flow ratio, a metric favored by investors to compare companies in the same industry.

“Australia is a mature gold jurisdiction and companies will have to go abroad for opportunities,” Foster said. “‘If Australian investors won’t support international M&A, then the companies will have to look for support from investors abroad.”

Newcrest and Evolution are among the miners scheduled to address the three-day Diggers and Dealers forum starting Monday in Kalgoorlie, Western Australia. About 50 companies, including BHP Billiton Ltd., Fortescue Metals Group Ltd. and other producers of gold, base metals and battery raw materials will make presentations to more than 2,100 delegates.

Investors Want Australia's Gold Producers to Buy Their U.S. Rivals

Smaller producers including Dacian Gold, Gascoyne and Red 5 Ltd. all have room to grow with “interesting opportunities to deploy cash” on exploration, according to Franklin Templeton’s Land, whose fund holds all three companies. VanEck’s list of junior companies with potential includes West African Resources Ltd., Cardinal Resources Ltd. and Gold Road Resources Ltd., Foster said.

West African rose 1.6 percent in Sydney trading Friday and Evolution advanced 0.4 percent, while a 24-member index of Australian gold producers declined 1.2 percent.

“The North American investors like what they see,” said Rohan Williams, executive chairman and chief executive officer of Perth-based Dacian, which poured a first gold bar in March at the Mount Morgans mine in Western Australia. Miners in the nation are winning attention by “aggressively exploring and finding more gold.” he said. Dacian raised almost A$50 million ($37 million) in share sales last month.

Australia’s gold producers can continue to outperform competitors -- and woo global investors -- by using strong cash flows to fund exploration at medium-sized mines that have historically lacked detailed studies, Melbourne-based RBC Capital Markets analyst Paul Hissey said in a note last month.

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