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Can Gold Miners Be Repriced as Consolidation Hits the Sector?


Jan. 30 2019, Updated 1:06 p.m. ET

Changing gold sector landscape

The consolidation in the gold sector (GDX) (GLD) has already taken a major step up, with two of the largest miners announcing mergers. The world’s economically accessible reserves are dwindling, and gold miners (NUGT) need to find more reserves to keep their production pipelines full.

When reserve discoveries slow down, M&As (mergers and acquisitions) could be miners’ next logical step to stay in business and grow.

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Major M&A announcements

On September 24, 2018, Barrick Gold (GOLD) announced its merger with Randgold Resources, which completed on January 2, 2019. This merger created an industry-leading gold company (NUGT) with the greatest concentration of Tier 1 gold assets.

On January 14, Newmont Mining (NEM) and Goldcorp (GG) announced that they had entered into an agreement in which NEM would acquire all of the outstanding shares of Goldcorp in a stock-for-stock transaction valued at $10 billion, creating the largest gold miner in the world.

Pan American Silver (PAAS) also announced its $1.07 billion cash and stock acquisition of Tahoe Resources (TAHO) in November. The purchase consideration represented a 34.9% premium to Tahoe’s share volumes over the last 20 days.

Gold miners as a whole have been underperforming the broader markets (SPY) (IVV) as well as gold prices (GLD) for the last few years. At the peak of the commodity cycle, miners made some M&A decisions that didn’t go their way.

Focus on returns

Moreover, due to higher gold prices, companies didn’t focus on reducing their per unit costs, which later came back to haunt them as precious metals prices plunged. They lost favor with institutional investors for these reasons.

However, as miners have started refocusing their efforts on cutting costs, restructuring their portfolios, and increasing shareholder returns, they could close their valuation gaps with gold and their own historical multiples and start trading higher.

In the next article, we’ll take a look at the performances of gold miners in 2018 and year-to-date and how they stack up against the broader market and precious metals.


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