Rapidly rising gold price squelching M&A activity


By Niall McGee
The Globe and Mail, Toronto
Sunday, September 1, 2019


The big run in gold bullion means potentially higher profits for miners, but investors say the same dynamic is stifling mergers and acquisitions activity, as both buyers and sellers struggle to come to grips with where the commodity price will eventually land.

"When the gold price is rising, it's going to be hard to get deals done. But if you saw it settle at US$1,500 [an ounce] for five or six months, I think you'd start seeing deals again," said Jonathan Goodman, chief executive of investment manager Dundee Corp., and chairman of gold-mining company Dundee Precious Metals Inc.

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After trading sideways for the best part of three years, gold has risen by about 20% in 2019, as investors buy the precious metal as a hedge against macroeconomic troubles, including a global economic slowdown, and geopolitical tremors, such as the continuing trade war between the United States and China. On Friday gold futures traded at around US$1,520 an ounce.

Gold M&A started with a bang this year, with Barrick Gold Corp. closing its zero-premium, US$6-billion acquisition of Randgold Resources Ltd. in January, and Newmont Mining Corp. (now Newmont Goldcorp Corp.) announcing the same month it was scooping up Vancouver's Goldcorp Inc. for US$10 billion.

However, since then, just a handful of deals have been announced, including Australia's St. Barbara Ltd. buying Vancouver-based Atlantic Gold Corp. for $722 million in May, and Toronto-based Kinross Gold Corp. purchasing a Russian gold development project for US$283 million in July.

There is no shortage of large-scale gold deals waiting to happen. The world's two largest gold companies, Barrick and Newmont, have indicated they are willing to sell around US$3 billion collectively in non-core mines over the next few years as they concentrate on whittling down their vast portfolios to the most profitable and longest-life mines.

Last month Barrick said it was starting a process to sell its 50% stake in its Kalgoorlie mine in Australia. Barrick CEO Mark Bristow also told The Globe and Mail he was prepared to sell its Massawa gold development project in Senegal.

Newmont's management hasn't been as explicit about naming assets, but analysts have pointed to the company's Red Lake and Porcupine mines, both formerly Goldcorp assets, and both in Ontario, as likely to be sold.

The rising gold price means that sellers can likely demand more than they would have a few months ago.

"Everybody gets stars in their eyes," Mr. Goodman said.

"The deals we saw earlier in the year were these low-premium deals. Now that we've got a [strong] gold market again, people are going to be looking for a premium."

For the most part the Newmont and Barrick mines for sale are high cost with low reserves, but that doesn't mean there won't be willing buyers.

Benoit Gervais, precious-metals portfolio manager with MacKenzie Investments, says Australian miners Evolution Mining Ltd. and Northern Star Resources Ltd. have proven themselves to be deft turnaround artists in such scenarios, acquiring underperforming mines and eventually making them profitable again. As examples he points to Evolution's 2015 acquisition of the Cowal mine from Barrick for US$550 milllion and Northern Star's 2018 acquisition of the Pogo mine from Japan's Sumitomo for US$260 million.

While Mr. Gervais sees the potential for many individual asset deals, he doesn't foresee a lot of transactions involving gold companies buying their competitors outright. Those deals tend to be costlier, riskier, and much harder to nail down, with discussions often dragging on over who the management and board of the new company should be.

"Whether you are Australian or Canadian, before you go out and try to buy another company, it's much simpler to buy an asset," he said. "You can buy exactly what you want rather than the whole package."

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