- What triggered volatility in the M&A activity in the gold mining industry over the past few years?
- Why were all mega deals concentrated in the gold price bull run?
- What attracted small gold companies for M&A post-2012?
The growth in the form of organic or inorganic is the primary reason that keeps stakeholders interested, attracted and glued to a company.
Mergers and Acquisitions (M&A) is the inorganic route for rapid growth for companies. This, if strategised and appropriately executed can facilitate a company to consolidate, diversify, expand, improve operational efficiency and hence, generate more capital (at a relatively faster rate than organic growth) for stakeholders. In the past decade (excluding the recession period of 2009), there have been 4,000 to 5,000 M&A deals across the globe in different sectors.
In the intervening period of the recession (2008-09), the global M&A industry witnessed a sharp decline, wherein the number of deals dropped by 32% (2008) and 28% (2009). These picked up significantly following the recession and the period of 2014-15 was the agile phase with over 5,000 deals valuing more than $3 trillion taking place each year.
The global mining sector was no exception as it saw a fall of 28% and 7% in the deal volume, while 56% and 27% decrease were seen in the deal value (2008-09). However, as the global economy recovered in 2010, the M&A activity in the mining sector improved at a faster pace at 65% (deal value) as compared to the global M&A movement at 25% (deal value). Although since then, the acquisitions in the mining sector had been volatile with a sharp increase, especially after the recession. This continued up to 2012 and saw a steep fall thereafter, primarily driven by the plummeting global commodity or metal prices.
Moreover, in the mining industry, gold was the most active sub-sector, followed by copper. Gold contributed more than 50% of the total mining M&A deals in 2010 and 2015. In the present blog, Televisory analysed the trend in M&A activity for gold, particularly in the past few years.
The gold M&A transactions went through different phases since 2009. These are explained in detail below.
Consolidation phase (2009-12): The distressed global economic condition (2008-09) led to the surge in global gold prices as the metal is perceived as a safe haven. This proved out to be a boon for gold companies as they generated huge free cash flows resulting in stronger balance sheets. This, in turn, lured the biggies for acquisitions to replenish their exhausting resources as well as to accelerate production numbers. Hence, the phase witnessed 147 deals (worth ~$73 billion) in total and 45 deals (worth $31 billion) were made in 2010 alone, primarily by major players. Furthermore, most transactions during this phase were for acquisitions for producing assets with the aim to swiftly enhance the production base and output for the acquiring company. The broader objective was to encash the current bull run in the gold prices. Thus, large players with sufficient cash balance, low gearing and financial stability acquired small players with a strong asset base resulting in long asset life and low-cost production profile. This brought consolidation in the gold mining industry with large mining assets for top gold producers.
The biggest deal during the phase was the acquisition of Lihir Gold for ~$9 billion by Australia’s top gold miner, Newcrest Mining. The rationale behind the deal was to gain quick access to Lihir’s high quality producing assets, thereby, making Newcrest the 4th largest gold player in the world. Newcrest paid ~28% premium for the acquisition to reach the above position. The next in league was Red Back Mining acquisition by Kinross Gold for ~$7 billion (~17% premium). This acquisition helped Kinross to gain prompt access to the new production of Red Back and its twain mines (Tasiast and Chirano) and thus, the firm expanded in the fast-growing region of West Africa. Likewise, Goldcorp acquired Andean Resources for $3 billion (35% premium). The aim was to integrate Andean’s Cerro Negro gold project (an advanced stage project) in Argentina that could complement its low-cost production profile as well as boost its production numbers substantially.
Meticulous phase (2013-15): While the industry was going through the consolidation, the gold prices started to dip, this was driven by a stable global economic condition and a lower inflationary scenario in major economies, this indirectly pushed the yellow metal to a lower spot. The declining gold prices squeezed the cash margins of gold players. However, the major players had already made a significant inorganic investment to augment their production base. Thus, deteriorating margins discouraged the big players on further bets in this space, resulting in a slowdown in the M&A activity in the industry. On the contrary, these players focussed on the cost efficiency and margin improvements from their prevailing operations to ensure they meet their debt obligations accumulated during the consolidation phase. This paved way for financial investors (with technical and operational excellence) as well as smaller players (with a limited budget), these could not jump the bandwagon in price rise phase. Hence, all players took calculative and meticulous action as per their risk-return capacity. This phase was dominated by small-cap transactions and saw 50 odd deals worth $23 billion.
The private investors; Wandle Holdings Ltd. (2015), Receza Ltd. (2014) and Lizarazu Ltd. (2014) made the largest investments during the phase. These invested ~$5.8 billion, ~$1.9 billion and ~$1.8 billion, respectively in Polyus Gold International. Similarly, among the small players, Agnico Eagle Mines and Yamana Gold topped the league with a joint investment of ~$3.4 billion to acquire Osisko Mining Corporation, a Canada based mineral exploration company. The next in the league were; Tahoe Resources, which acquired Rio Alto Mining and Alamos Gold, which acquired AuRico Gold, both for ~$1.1 billion each.
Divestment phase (2016-H1 2017): The global gold prices saw an increase in 2016, but remained stable thereafter. However, this increase was significantly lower than the 2011-12 peak. Therefore, big players continue to focus on improving cash flows. These also began strengthening their core portfolios by selling off non-core assets, this allowed small and medium players to strategically consolidate their holdings. Thus, this phase can be characterised as divestment driven with the majority of deals being small in value (less than $1 billion).
The big players like Barrick Gold and Newmont Mining sold off their non-core and unprofitable assets with an aim to focus on core assets, thereby, improving shareholder value. Goldcorp divested its Los Filos mines in Mexico to Leagold Mining for $350 million. Eldorado also exited China by selling its stake in Jinfeng mine and two other mines to a local player.
In a nutshell, gold mining sector witnessed a significantly higher number of transactions during 2009-12 as the global economy recovered from the 2008-09 economic catastrophe, however, transactions declined henceforth. The M&A space in the global gold mining sector saw the highest volume and value in 2010, this was driven by acquisition from big players. The transactions reduced since 2010 as these players took a backseat, while indirectly making way for the financial investors and small players to consolidate their holdings in the industry.
Going forward, the overall global economy will continue to mend and is expected to be driven by the growth in the United States, China and Europe. The US monetary policy stance has shifted the focus towards a moderate tightening, which was evident from three rate hikes by the FED (last 12 months). Hence, as the world’s largest economy continues to move forward, there are expectations that the FED would again implement the hike in its December meeting. China and Europe also saw improvements in major economic data variables such as PMI, employment sector, inflation, etc., this signals confidence in the respective economies.
The positive economic outlook can weigh on the yellow metal, which is considered as a hedge against the weak economic scenario. Thus, on one hand, gold may become an unattractive investment option, while on the other, growing global economy is anticipated to aid the inflation higher providing support to the commodity. Hence, given the stable to high demand range, the global gold prices are expected to continue to trade in a broader range of $1,200-1,400 per ounce over the next 2 to 4 quarters. In addition, given the price stability at current levels and the fact that most major players have already played their cards in the consolidation phase, the M&A activity in the gold mining space is likely to continue at a slower but steadier pace. While this will be dominated by small deals. Televisory believe that small and medium players will continue to take advantage of the current price range and consolidate their holdings and strategically expand in different regions in the short to medium term.