Gold Veteran Says Bigger May Not Be Better as M&A Blitz Hits
(Bloomberg) -- The $15 billion flurry of deal-making that will super-size the gold industry’s leading producers is no guarantee of better performance, according to an Australian miner who’s been outpacing larger competitors.
Rising gold prices and a hunt to boost additional reserves of the precious metal have spurred Newmont Mining Corp. and Barrick Gold Corp. to acquire rival companies and add more operations. Their moves have stoked expectations that other producers will now also look to combine.
“The thesis being offered is that bigger is better, and historically in the gold sector that hasn’t proven to be value creating for shareholders,” Jake Klein, executive chairman of Sydney-based Evolution Mining Ltd., said by phone on Tuesday. “This time it may be different, but certainly the past has not demonstrated that.”
Mid-sized and small producers including Evolution and Canada’s Wesdome Gold Mines Ltd. are among those to have outperformed larger competitors over the past six years. A Bloomberg Index of 14 major gold companies has lost about 47 percent since the start of 2013, as spot gold fell about 23 percent. The precious metal traded at about $1,289 an ounce on Tuesday.
A surge in deal-making at the start of the decade, including Barrick’s C$7 billion ($5.3 billion) takeover of Equinox Minerals Ltd. in 2011 and Newcrest Mining Ltd.’s $9 billion acquisition of Lihir Gold Ltd. in 2010, resulted in producers later being forced to book major writedowns. Valuations in the sector tumbled as the gold price cratered through 2015, forcing the industry’s top ranks to sell assets, trim costs and focus on cutting debt.
There’s no guarantee that a new bout of deal-making will avoid a similar outcome, said Evolution’s Klein. “This is a cyclical sector, and so is this a case of the sector buying high only to eventually have to sell low again,” he said. “It’s an investment banker’s dream.”
Evolution acquired Barrick’s Cowal mine in Australia in 2015 as the producer sold off some non-core operations, and will examine an expected further round of asset sales as newly-merged companies review their combined portfolios, Klein said.
Further deal-making in the gold sector makes sense and would offer producers including Newcrest an opportunity to increase both the scale and diversity of their collection of assets, Citigroup Inc.’s Sydney-based credit specialist Anthony Ip said in a note.
Some mid-sized miners could also be tempted to join the rush for deals, said James Wilson, a Perth-based analyst at Argonaut Securities Pty Ltd. “When a million ounce producer can’t find growth options, then perhaps by merging with another one of the mid-tier miners they may see more investment appeal and more of a robust balance sheet,” he said. Developers of new operations may also attract a bout of attention from predators, he said.
©2019 Bloomberg L.P.