Most companies are cool to M&A, despite tie-up between Barrick and Newmont
By Alistair MacDonald and Ben Dummett
The vast majority of the world's gold miners have yet to join the wave of mergers reshaping the top of their sector, even as investors say more tie-ups are necessary amid poor returns and depreciating gold reserves.
Since the bursting of the commodity bubble in 2011, bankers and investors have predicted the thousands of small and midsize gold miners that populate this sector would merge.
This week, the sector's largest companies, Barrick Gold Corp and Newmont Mining Corp said they would form a Nevada joint venture that, if a separate company, would be the third-biggest producer of gold in the world. Last fall, Barrick also bought Randgold Resources and in January Newmont bought Goldcorp Inc.
But the rest of the sector has yet to join in. The industry feels burned by past mergers and acquisitions where purchasers overpaid for assets. Many companies are unwilling to sell with share prices so low and, according to investors, because entrenched management doesn't want to put its well-paying jobs and lofty positions at risk.
"Capital has become more difficult for companies to access and important to that access is scale and liquidity, and some of those companies don't have the size to attract that attention," said Douglas B. Groh, a fund manager at Tocqueville Asset Management.
Even with the recent burst of M&A, last year's gold-mining deals totaled $12.4 billion, almost half the peak in 2010, according to Dealogic. For mining as a whole, 2018's tally, at $59.6 billion, was 55% lower than the 2011 peak. For oil and gas, the total was $340 billion, the highest value in the past decade.
Some managers have struggled to sell. Africa-focused Roxgold Inc. has been trying to sell itself for some time and is currently involved in discussions with at least one party, according to people familiar with the matter.
Kinross Gold Corp. has been trying to sell its 90%-owned Chirano mine in Ghana for more than a year without reaching an agreement, given what some potential buyers see as a high price, according to a person familiar with the matter.
Roxgold and Kinross declined to comment.
Miners and bankers give a variety of reasons for why the gold mining merger wave hasn't come. The poor performance of gold miners' shares means that sellers want to hold out for better valuations and buyers are reluctant to use shares they believe are undervalued for acquisitions.
The S&P TSX Global Gold Index is down 51% since its 2011. The S&P 500 has doubled in value in that time.
The industry as whole has a poor record in M&A. Miners overspent during the decadelong bubble that ended in 2011. That put off investors and made some executives wary of doing deals.
In 2016, PwC calculated that big miners had written off $200 billion of the value in acquisitions and projects over the previous five years.
Executives may be reluctant for another reason, investors say. They don't want to put themselves out of a well-paid job by merging or selling their mines.
In Canada, for instance, chief executives and presidents of mining companies they surveyed received a basic salary of C$200,000 and C$400,000 ($149,400 and $298,800) in 2017, according to recruitment consultants Hays. That was the highest wage among the various sectors in Canada that Hays surveyed. Those high wages came despite poor returns from the sector.
Between 2010 and 2016, Yamana Gold Inc. paid its CEO over $60 million, according to research by Paulson & Co, despite its share price falling by almost 70% in the period.
"There are probably too many gold companies around with poor managers, so get these gold miners in stronger management hands," said Joe Foster, who runs the VanEck International Investors Gold Fund.
Investors' lack of interest is a factor pushing for consolidation, with miners needing to bulk up to get attention. For smaller miners, the ascendance of index funds has made it harder to attract money, because they aren't in the markets that these investment vehicles track.
In Canada alone, there were 1,184 miners listed on the Toronto Stock Exchange and TSX Venture Exchange as of this January, with a combined market cap of just C$271 billion.
Miners are also chasing a depreciating resource. The World Gold Council estimated that the industry produced 3,244 tons of gold in 2018, with production peaking at 3,252 tons in 2016.
Even as these mines deplete, there have been very few new discoveries to replace the lost production, the bank says.
Still, bankers and executives say companies are currently talking and they say the much anticipated consolidation will happen.
There were two smaller deals this week, including Newcrest, the world's third-biggest listed gold company by market value, inking a $806.5 million deal to buy a majority stake in a Canadian mine.
Tom Palmer, the chief operating officer of Newmont, said smaller players are waiting to see what the bigger miners sell once they have completed their mergers before they start their own M&A.
"Fast forward two or three years, there will be countless more" mergers, he said.
Write to Alistair MacDonald at firstname.lastname@example.org and Ben Dummett at email@example.com
Corrections & Amplifications The total value of last year's gold-mining deals was $12.4 billion. An earlier version of this article incorrectly stated that the total value was $21 billion. (March 13, 2019)