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More mega-miner M&A during a healthy gold correction

Commentaries & Views

With Gold Futures in the process of consolidating a 3-month $355 move higher that began with a $50 downside reversal on February 2nd, the world's largest gold miner announced its intention to become even bigger on Sunday evening. U.S. based Newmont Mining Corp. (NEM) made an almost $17 billion offer to acquire Australia's Newcrest Mining Ltd. (NCMGY), aiming to distance itself further from number two producer Barrick Gold Corp.(GOLD).

If the proposed deal goes through, the newly combined company would produce nearly twice as much bullion as closest rival Barrick, after Newmont said it would offer 0.380 of its own shares for each Newcrest share held.

Newmont's all-stock offer would be the largest gold mining takeover ever, and comes on the heels of another industry deal for rival Yamana Gold (AUY) completed recently that is set to close later this month. The offer from the top bullion miner could trigger bids from rival gold producers, but none would come from the most likely counter-bidder being Barrick Gold.

Although Barrick CEO Mark Bristow has stated numerous times over the past several years that much more consolidation in the industry is necessary, he denied a counterbid for Newcrest during an interview on Monday with Bloomberg. "There is a difference between value merger acquisitions and getting bigger for the sake of getting bigger," Bristow added.

However, a source familiar with Newmont management's thinking stated on Tuesday the firm is open to slightly increasing its $16.9 billion offer for Newcrest for a third time, as this is the second offer Newmont has made for Australia's largest gold miner. The prior offer, which was 0.363 shares of NEM stock for each share of Newcrest stock, was rejected.

After news of the deal leaked early Monday in Australia, before Newmont had a chance to do full due diligence, the firm would be willing to slightly increase its offer and is not worried about being outbid, the source added. But investors should also keep in mind that some are speculating this week's headline mega-merger news could result in a bidding war for Newcrest Mining, based on recent history.

The aforementioned Yamana Gold takeover saga began with a more definitive agreement, under which Gold Fields Ltd. (GFI) would acquire all of the outstanding common shares of Yamana. Yet, the deal was canceled in November, with Yamana paying a termination fee of US$300 million to Gold Fields after a rival bid of a combined $4.8 billion in cash and shares by Aginco Eagle Mines Ltd. (AEM) and Pan American Silver Corp. (PAAS) was subsequently accepted.

With the appetite for large, transformational mergers and acquisitions returning, Yamana founder Peter Marrone correctly prophesized in an interview on January 20 that the nearly $5 billion takeover would be the catalyst for "much needed" consolidation in the gold industry this year.

Marrone also stated this Monday during a phone interview, "With this transaction, there will be fewer other senior companies, and so it seems to me that the logical next place for consolidation is with the mid-tiers." Based on sector deal-making history, the high-profile mining executive will likely be proven correct again in the not-too-distant future, with more M&A to follow in the junior space as well.

The Barrick/Randgold merger announcement in September of 2018, followed by Newmont Corp.'s subsequent acquisition of Goldcorp Inc. a few months later, became the catalyst that sparked a wave of M&A in the junior space throughout 2018 – also a time when the mining sector was being ignored by generalist investors as it is currently.

With producers struggling with higher operating costs, declining output, and harder-to-mine resources while new deposits are more difficult to find, M&A will be a topic of conversation among industry executives during the upcoming conference season beginning at the end of the month.

BMO Capital Markets will host its Global Metals & Mining Conference from February 28 to March 2, 2022 in Hollywood, Florida. This major industry event will be followed by the annual PDAC 2023 Convention – the world's premier mineral exploration and mining convention will take place from March 5 – 8 in Toronto, Canada.

Meanwhile, Gold Futures did not spend much time trading between $1800-$1900 before this selloff, as bullion quickly moved from $1700 to $1900. After such a sharp move higher into extreme overbought territory, we may see testing of the $1800-$1850 region before the market has strong conviction to go higher again.

Relative weakness in the miners and silver to the gold price over the past few weeks is hinting of more consolidation in precious metals stocks as well. After quietly moving up over 50% from a 7-year cycle bottom in September, both GDX and GDXJ are experiencing a healthy consolidation of out-sized gains along with the gold price.

After strong moves higher from accumulative basing patterns, many junior late-stage developer M&A candidates are now presenting lower-risk entry points. Before the coming wave of mid-tier and junior M&A likely to follow recent mega-merger announcements, it is best to accumulate long-term holding positions in the best in breed late-stage junior developers on weakness.

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