Contributed Commentaries
Miner M&A Monday's big return to the gold space
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Speculation about asset divestitures among global miners after recent M&A deals began to come to fruition on Monday, November 17th, when Barrick Gold (GOLD) sold its 50% stake in the Kalgoorlie Super Pit gold mine to Saracen Mineral Holdings for $750 million. Trendsetter and high-profile Barrick CEO Mark Bristow has been quite adamant recently about selling off assets that it does not own 100% of, along with projects that do not produce over 500,000 ounces per year for at least 10 years.
The following Monday, Australia’s Evolution Mining Ltd agreed to buy the Canadian gold mining complex Red Lake from the world’s largest gold miner Newmont Goldcorp (NEM) for US$375 million in cash plus a US$100M contingent payment tied to new resource discoveries. The Red Lake mine has an incredible mining history and was the foundation of Goldcorp, but does not move the needle much for a company the size of Newmont Goldcorp. This is the second Canadian asset bought by Australian miners this year (Junior developer Atlantic Gold was taken over by Aussie miner St. Barbara in May) and I expect the trend is likely to continue due to a valuation gap between the two different markets.
Additionally, Kirkland Lake Gold (KL) announced on the same day that it had agreed to buy Detour Gold (DGC.TO) for $4.9 billion in an all-share deal, whereby Detour shareholders will receive 0.4343 shares of Kirkland. Although Kirkland sold down over 17% on the announcement, long-term investors have since bought the weakness as the deal offers excellent optionality to the gold price once the market has priced in a solid $1500 floor in bullion.
Then, on Monday this week, Chinese company Zijin Mining agreed to buy Continental Gold, a Canadian-listed company with interests in Colombia, in an all-cash deal worth $1 billion. But a top executive with the target company said elevated security concerns in Colombia pose a risk to the deal, reported Reuters. “Zijin doesn’t have any experience in Colombia, and we have obviously had some incidents in the past,” Continental Chief Financial Officer Paul Begin told Reuters. “But if a major security incident happened at any project, it would be considered a material adverse change and they would have an out if they wanted to,” he said. Zijin’s cash offer of C$5.50 per share represents nearly a 13% premium to Continental’s last Friday close.
Moreover, British gold miner Centamin Plc on Tuesday rejected a hostile US$1.9 billion all-stock takeover proposal from Canada’s Endeavour Mining (EDV.TO), saying it did not offer enough value to Centamin shareholders. The offer was proposed at a 13% premium to Centamin's closing price on Tuesday evening and its stock shot up by just shy of 15% after the announcement. The firm’s only operating Sukari mine lies 560 miles to the southeast of Cairo and is slated to become one of the world's biggest 10 gold deposits. The Toronto-listed Endeavour, which owns four West African mines, said Centamin had rejected several attempts to engage in talks.
The increased M&A activity should not come as a major surprise, with the spotlight being pointed towards the gold mining sector lately for being immensely fragmented around the world, along with fewer gold discoveries taking place. Since the larger deposits that have not already been found are located in harder to reach places, and/or in more risky jurisdictions, production costs are rising. It makes sense for larger companies to gobble up smaller ones, as it is cheaper for a gold miner to acquire new reserves by buying a rival, rather than by investing in exploration.
Moreover, there are numerous mid-sized gold miners whose production costs are higher than those of the larger global miners. Shareholders of such companies have been lobbying for mergers to take place, with high-profile activist investor John Paulson putting together a coalition of shareholders in gold mines, the Investors Gold Council, to petition for change.
Global Miners are also trying to bring back generalist investors into the mining space. The retail market abandoned the sector in droves post-2012 after the price of gold plummeted, along with many other failed M&A deals which were secured mostly by diluting shareholders to acquire large, uneconomic deposits.
Global gold mining companies are set to continue M&A activity into 2020 after sealing a record $30 billion worth of contracts this year, latest data show. This burst of sector consolidation marks the most valuable merger and acquisition binge since gold prices hit their highest peak almost 10 years ago, exceeding the previous $25.7 billion deal spree high set in 2010.
There have been close to $8 billion in gold buyouts during the past three weeks alone, along with a $1.9 billion proposal for another. Back in May, I penned a missive (M&A Heats Up – Here are a Few More Takeover Candidates) suggesting two junior gold stocks for speculators looking for takeover candidates to consider.
With many quality juniors being discounted the past few months, I expect mid-tier and major miners will continue to be in a buying mood into next year. And at some point, we can expect these producers to look further down the food chain to junior developer/explorers who control large, established resources with blue sky potential. This will be a natural progression of the recent deal flow, as the majors are running low on economic reserves for future production. The strategy of buying a basket of the best in breed resource-rich juniors at this low point of the cycle makes sense and the sector is presenting excellent buying opportunities for informed speculators.
If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at https://juniorminerjunky.com/subscribe. The service provides members with a Top 8 Take-Over Candidate List that contains junior developers boasting large-scale gold and/or silver deposits that are at, or near, the finance stage. Although the JMJ service has reached capacity of 250 members, 6 spaces will be opening up next week and there is a waiting list if you are interested in becoming a member.
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