The Alamos-AuRico merger
In the last part of this series, we looked at declining production profiles and the lack of new discoveries. We saw how this can lead to an increase in mergers and acquisitions (or M&A) in the gold space. A recent announcement in April revealed the merger agreement between Alamos Gold (AGI) and AuRico Gold (AUQ). The merger is expected to close in 2Q15.
The Alamos-AuRico merger rationale is to create a significant mid-tier producer that can withstand the ongoing low gold prices. Cost synergies emerging from the merger will help lower costs. Alamos has a good cash position, and AuRico has a mine in Ontario, Canada, which is ramping up production. The merged company will have a more diversified country-political risk than individual companies.
According to the merger agreement, the combined production profile of the merged entity will be 375,000–425,000 ounces of gold in 2015, with the potential to grow to 700,000 ounces. In addition, the balance sheet will be in a position of net cash with growing cash flow generation to fund organic growth. There will also be synergies in Canada and Mexico. The total transaction value is $1.5 billion.
Strong stock performance since merger announcement
Share prices for Alamos Gold (AGI) and AuRico Gold (AUQ) reacted positively to the merger news. Both stocks have outperformed the VanEck Vectors Gold Miners ETF (GDX) and the SPDR Gold Trust (GLD) since the merger announcement, as you can see in the above graph. This suggests that investors are in favor of industry consolidation, which could lead to a reduction of costs and the strength to endure a low gold price environment.
Will Newmont Mining and Barrick Gold merge?
The Newmont Mining (NEM) and Barrick Gold (ABX) merger is one of the most talked about potential mergers in the gold space. The companies have been contemplating a merger for a long time—three times in the last eight years. If combined, the two companies will produce ~12% of annual mine output, which is three times the output of the next-largest producer, Goldcorp (GG). So far, all the talks of a deal have been thwarted for one reason or another. To read more about the merger talks and the reason merger talks were called off, read Market Realist’s Why a Barrick-Newmont merger would make sense.
Newmont, Goldcorp, and Barrick form 20.1% of GDX’s holdings.
Debt is another issue that’s plaguing some gold miners. It’s also one of the causes of divergence between the performance of gold miners and gold. We’ll discuss this topic in detail in the next part of this series.