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Producers to seek gold ounces through more exploration spending, deal-making

Kitco News

(Kitco News) - Acquisitions are likely to continue in the gold-mining sector during 2020, and producers are also likely to hike exploration spending to make up for the cutbacks during the earlier part of the last decade, analysts and fund managers said.

The bottom line is that mining companies have to eventually replace the ounces that they are currently mining. And in the case of mergers, stock valuations of junior miners are still low enough to make companies with good assets a bargain in the current environment, some say.

Mergers and exploration spending were slashed several years ago when companies were looking to cut costs after gold prices went into a bear market. The conundrum is that lower exploration and development spending eventually means less mine output – and in turn less revenue – down the road if companies aren’t replacing the ounces they are mining.

“These guys are sandwich makers, right? When you run out of bread, you run out of bread,” said Matt Badiali, senior analyst with Banyan Hill Publishing, who writes for a subscription-based newsletter aimed at retail investors.

Companies did cook up a number of deals in 2019, with the consultancy Metals Focus reporting earlier this month that acquisition spending amounted to $18.2 billion 2019, the most since 2010. However, roughly two-thirds of this was from one transaction – Newmont Corp.’s takeover of Goldcorp. Still, the number of total deals rose to 89 from 86 the year before, Metals Focus said.

If producers are not discovering new deposits themselves, they have to rely on acquisitions, but “there is not that much to acquire out there,” Badiali said.

“So exploration spending has to come up,” he continued. Companies can do this either in-house or by investing in junior mining companies, he added.

Badiali does anticipate more acquisitions within the industry. However, he also expects this to occur mainly with companies with small to mid-sized capitalization as they “try to build something they can then turn around and make it valuable to a major.”

Ralph Aldis, co-portfolio manager of U.S. Global Investor’s two gold mutual funds, pointed out that share prices of many junior miners rose more modestly last year than some of the bigger companies.

“So there is a big valuation gap right now between juniors and seniors,” he said, commenting that junior companies have been largely “ignored.”

“I think, increasingly, you’re going to see more transactions down there,” Aldis said. He later added, “I think that’s a cheaper way to acquire ounces at this point in time. You can go out and drill, but there’s no guarantee you’re going to find something.”

At least if a bigger company buys a junior, it knows it has an actual resource, he added.

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