Need for mergers and acquisitions
After peaking in 2011, gold prices fell for four straight years, which led gold miners to cut back on sustaining and growth capital, lower exploration spending, and divest assets. Years of underinvestment impacted gold miners’ production profiles negatively. Most of them have flat or declining production pipelines for the next few years.
Now, with gold prices on stable footing, miners should once again be back hunting for bargains to offset their production declines, improve their geographical exposure, and lower their cost structures. Senior miners could look at intermediate and junior (GDXJ) miners for growth.
Goldcorp’s (GG) CEO, David Garofalo, stated during its investor day that the company is looking to perform mergers and acquisitions (or M&A) to find large undeveloped resources. He stated that the company would like to do this in partnership with some of its senior peers (GDX). However, he denied the possibility of going for corporate M&A.
Garofalo stated, “I think it’s very difficult to do corporate M&A. But I think bringing some of these large-scale, undeveloped, really good deposits into the pipelines and cultivate them within the balance sheets and the technical teams of seniors makes a lot of sense in order to reverse the dynamic that we see in the industry right now, which is declining reserves, declining production.”
Kinross Gold (KGC) acquired Barrick Gold’s Bald Mountain and 50% of Round Mountain in Nevada in January 2016. This served the dual purpose of increasing its production profile and diversifying its risk exposure across geographies. Barrick Gold (ABX) suffered at the hands of investors due to the timing of its acquisitions at the peak of the cycle in 2011, which were eventually written off.
Newmont Mining (NEM) acquired the Cripple Creek & Victor Mine from AngloGold Ashanti (AU) in 2016, which is performing in line with expectations. Yamana Gold (AUY) acquired RDM (Riacho dos Machados) in early 2016, which is expected to produce 100,000 ounces of gold each year, with all-in sustaining costs of less than $800 per ounce.