Consolidation is taking place in the global gold sector after years of speculation
Absa analyses SA’s gold sector and the likelihood of more mergers and acquisitions
Two mega-deals in less than four months have heralded the much-talked-about consolidation in the global gold sector, which has been the subject of speculation for the past couple of years, says Craig Brewer, co-head of Banking Africa at Absa Corporate and Investment Banking (CIB).
First to be announced in September 2018 was the $6.5bn deal between Barrick and Randgold. The most recent is the $10bn mega-merger between Newmont and Goldcorp, which will create the world’s biggest gold producer by output.
Brewer says this deal could be positive for the gold industry but it will create material uncertainty for the remaining larger producers regarding who will be acquired next or needs to merge.
He says the market reaction to these mega-mergers has generally been positive so far, but adds it is worth remembering the constant refrain from gold hedge-fund manager John Paulson who has often criticised the gold industry for entering into bad deals that destroyed shareholders.
Investors have often complained that “undisciplined growth results in poor returns” and has over time caused all gold companies to hold back on development and exploration, says Brewer. Now, it is hoped, these mega-merges will create real value over the long term.
Gold companies have over the past 10 years or so been focused on earnings and cash dividends over exploration. Current mining rates of existing resources cause net depletion. Therefore, a motivator for these mega-mergers is the need to add projects to boost production profiles while obtaining geographic diversity, particularly from higher-risk regions.
From a South African perspective, says Brewer, the recent mergers now make AngloGold Ashanti the third-largest producer, albeit some way behind the two goliaths, with AngloGold producing 3.8m ounces in 2017, behind Newmont–Goldcorp's 7.9m ounces and Barrick-Randgold's 6.6m ounces. Behind these three are Kinross Gold with 2.7m ounces and Newcrest with 2.3m ounces.
This contrasts with the situation 20 years ago when Anglo American created the world’s number-one gold miner by merging its South African assets to create AngloGold.
Nowadays the miner only gets about 15% of its production from SA and “is facing a dying South African gold industry, with its primary South African mine, Mponeng, the world’s deepest mine, having to cut costs along with all of its South African peer group”, Brewer says.
He says the question is whether AngloGold will dispose of its remaining South African mine and go hunting abroad to complete the final leg of its internationalisation process.
“Will it be AngloGold or a Kinross and Newcrest as the new combination, which will provide potentially much-needed scale and dual listings?”
Brewer says the alternative to the current merger activity would be outright acquisitions. He cites Vancouver-based B2Gold – with operations in Africa, South America and the Philippines – as a potential target because of its growth profile and operational expertise in West Africa in particular.
“At the asset level, a potential bidding war may be appearing over TSX-listed junior gold miner SolGold that is undertaking exploration work in Ecuador. The share price was up 30% last year, with Newcrest now holding 15% and surprising entrant global mining behemoth BHP holding 11%, albeit for the copper deposits,” he says.
Brewer says consolidation in the gold sector in SA may still occur although the backdrop is less certain.
“Not only [are there] politics with the upcoming election, strikes on some of the local gold mines, dwindling grades and output ever deeper in the ground, but there are limited options in the SA gold sector. Perennial dealmaker Sibanye-Stillwater will soon be bedding down Lonmin and, after recent strike action, may well look offshore after its very successful palladium acquisition in North America, so it may not be the consolidator in SA.”
Harmony showed appetite in acquiring a cash-positive mine from AngloGold but may be more focused on its Wafi-Gulpu copper and gold deposit in Papua New Guinea, which, if successfully developed, will be a massive kicker for the group along with its joint-venture partner Newcrest.
“This leaves Gold Fields, and it has clearly demonstrated an appetite for non-South African assets and would be hard-pressed to acquire locally while it continues to work on production issues at South Deep to meet its production forecasts,” Brewer says.
In fact, he predicts a possible deconsolidation in SA, with the major South African gold producers offloading assets to the second-tier miners and then focusing on acquiring offshore. The overriding caution is that costs will not come down in the South African gold sector, which will make mergers and acquisitions (M&A) difficult at current prices, though not insurmountable.
“On a global level, M&A will definitely continue, and the more optimal strategy to take by all gold mining groups with M&A-supportive balance sheets may be to hold out for some of the disposals that will occur post these mega-mergers. Quality assets could be available as the leading groups optimise their portfolios,” he says.
This article was paid for by Absa.