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M&A heats up as gold miners carve out a significant bottom

Commentaries & Views

In a sector where investor confidence has been extremely low for the past several months, mining companies have begun to re-kindle efforts to explore alliances and partnerships to bring promising projects online and share the risk between parties.

While underground gold reserves held by major mining firms continue to be low and falling, new reserves are becoming increasingly harder to find as resources are used up, and exploration is costly. Major mining companies have a few ways to remedy their shortages. They must either discover new underground resources through exploration, or acquire them via the takeover of junior development companies.

After years of underinvestment during the previous bear market, global miner production profiles are under pressure which makes further M&A inevitable during the next few years. The current situation in the mining space is providing an opportunity for global mining companies to use strategic M&A to position themselves to become the clear winners during the next decade.

In late May, South African gold miner Gold Fields (GFI) announced it was buying Canada's Yamana Gold (AUY) in an all-share deal worth $6.7 billion, which would have made it the world's fourth largest gold producer. But backlash regarding the deal came immediately from Gold Fields investor Redwheel, who called for the transaction to be scrapped in June.

Then in October, VanEck Associates Corp., the biggest Yamana investor and the third-largest shareholder in Gold Fields, announced it was critical of the transaction as well. The Globe and Mail reported Van Eck portfolio manager Joe Foster calling the deal "poorly structured" and said the market doesn't understand the strategy behind the agreement.

Fast forward to last Friday. As the gold price began to move sharply higher, Yamana received an unsolicited offer from Agnico Eagle Mines (AEM) and Pan American Silver (PAAS) to acquire the company in a near $5 billion deal. With Gold Fields having already faced immense investor criticism for the 34% premium offered when its original bid was announced, the firm waived its right to match the rival bid on Monday.

Subsequently, Toronto-based Yamana said on Tuesday that it had inked a deal with Agnico Eagle Mines and Pan American Silver for the acquisition by Pan American of all of the issued and outstanding common shares of the Company and the sale by Yamana of certain subsidiaries and partnerships which hold Yamana's interests in its Canadian assets, including the Canadian Malartic mine, to Agnico, all by way of a proposed plan of arrangement.

Speaking on a media call following the failed bid on Wednesday, Gold Fields CEO Chris Griffith stressed that it was "not the only and won't be the only" option available to the company. "We have a number of assets that are of interest to us as part of our due diligence process. We will now, in the same discipline process, consider those other options in time to come as part of our broader strategy," he told journalists, but said that it was too early to comment on what exactly the next opportunity for Gold Fields may be.

With mining space M&A deals typically coming in bunches, on Thursday morning the precious metal's royalty space announced a friendly merger as well. Canada's Triple Flag Precious Metals Corp (TFPM) and Maverix Metals Inc (MMX) agreed to a friendly combination in which Triple Flag will acquire Maverix for cash and shares valued at US$3.92/sh, at 10% premium to Maverix's share price and valuing Maverix at US$606 million.

During this time, the gold price has risen more than $130 over the past five Comex trading sessions, culminating with a CPI data released yesterday that came in well under estimates.

Following a false move lower in the gold price last Thursday, that was driven by computer algorithmic selling during Fed Chair Jerome Powell's press conference hawk-talk, the safe-haven metal began a sharp move higher from a triple-bottom at $1620. After clearing strong overhead resistance with ease yesterday, Gold Futures appear to be headed towards the key $1800 level soon while silver is nearing strong resistance at $22.

Meanwhile, precious metals stocks have been forming an accumulative bottom over the past several months, with silver and its miners leading the way. When silver and its miners lead the gold price, like they have been since late August, that generally is a bullish a sign for the entire precious metals space.

The GDX took the lead on Thursday, clearing initial overhead resistance at $27.50 to make a higher-high. A weekly close above $30 would suggest a bottom being completed. The GDXJ moved sharply towards initial overhead resistance at $35. A weekly close above this level would be a higher-high on its weekly chart, while a close above $37 would suggest a significant bottom being in place.

Once investors witnessed increased buying in both miner ETFs following last Friday's short-covering fueled move higher on huge volume, many higher-risk juniors have moved up double-digits from deeply oversold levels.

In 2016, the GDXJ began the year by zooming nearly 300% from an accumulative bottom in just 6 months. Once the 2016 up-leg peaked mid-year, the consolidation of those out-sized gains ended with an indecision monthly candle low 26 months later in September 2018 at the $25 region. The gold price was trading at $1250 per ounce when this low was struck.

The more recent move in the junior miner ETF from March to August 2020 took just 4.8 months to complete after moving up roughly the same staggering amount from a pandemic induced spike low. In similar fashion, once the 2020 up-leg peaked mid-year, the consolidation of those out-sized gains ended with an indecision monthly candle low 26 months later in September of this year, also at the $25 region.

Only the gold price was trading at $1650 per ounce this time, presenting a lower-risk opportunity to buy and hold a basket of quality juniors for the duration of a new mining cycle which has likely just begun.

During this secular gold bull that began at the turn of the century, the precious metals sector routinely pendulum swings from extreme greed, when speculators should be trimming profits; to extreme fear, when cashed-up contrarians should be buying at lower-risk/reward entry points before the next up-leg begins.

The recent move lower in the precious metals sector since the August 2020 peak has gold equities presenting one of the best value propositions seen in quite some time, at a time of both historic global debt-to-GDP imbalances and record central bank money printing. With market perception and sentiment now assuming a more dovish Fed and inflation still at an extremely high rate, this is the perfect environment for the gold complex to begin its next up-leg.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.