A rising gold price over the past three months has triggered a surge in merger and acquisition activity with at least one investment bank tipping that the next stage will be an outbreak of merger mania.
According to Australian-based Macquarie Bank a takeover rush is not only underway but it essential to save the sector which has become fragmented to the point where it does not attract the attention of institutional funds managers.
Rather than invest in a broad selection of relatively small gold miners, a preference has developed for exchange-traded gold funds and companies dealing in gold royalties which are more directly exposed to the metal and carry less risk than mining.
Gold Price Moving Up
Macquarie is not alone in forecasting an increase in M&A activity among gold stocks after the price of the metal added more than $100 an ounce, rising from $1203 an ounce in mid-November to a latest price of $1317/oz.
BMO Capital Markets, a Canadian investment bank, has also “explored” a range of potential merger partners following a deal which has seen Barrick Gold acquire Randgold to create the world’s biggest gold miner, and Newmont announce a deal with Gold Corp.
Gold piggy bank. Photo: GettyGetty
Top of the potential gold mergers on BMO’s list are deals between Newcrest Mining and Agnico Eagle, and Gold Fields with Yamana.
But whether any of the possible mergers become more than speculation is less interesting than the reasons for a potential shake-up of the global gold industry.
Not Enough Big Gold Miners
Macquarie’s thesis is based on an argument that there are not enough “investable” gold producers, those with sufficient size to permit an institution to buy and sell a reasonably large amount of stock without disturbing the market.
There has also been excessive focus on austerity during a period of low prices over the past five years which has led to a decline in gold production, asset sales and the shelving of new projects.
“In 2010, at the peak of the previous cycle when gold was close to an all-time high, there were 27 producers with a market capitalization of more than $1 billion, 14 of which were over $5 billion and 10 over $10 billion,” Macquarie said in a reported titled “Merger mania is here (and it will save the sector)”.
The latest breakdown of the global gold mining industry, which is 60% smaller than 2010, was of 35 miners worth more than $1 billion, but with only three valued at more than $10 billion.
Macquarie’s conclusion was that “consolidation is coming, up and down the food chain”.
“For producers to thrive the sector needs to consolidated and get more concentrated,” Macquarie said.
“It could result in a wave of consolidation among the group of seven to eight producers (valued) between $2 billion and $5 billion, as well as the other 20 or so $1 billion producers”.