Over the past decade, the gold price has returned 16% in dollar terms, but shares in producers of the yellow metal have struggled to keep up with the value of the underlying commodity.
Barrick Gold (NYSE: GOLD) and Newmont Corp (NYSE: NEM), the world’s largest gold miners, have returned -5.1% and 4.7% per annum respectively (including dividends) over the past 10 years. An equally weighted basket of both stocks would have returned -0.2% per annum.
Over the past couple of decades the sector has been held back by a string of poor capital allocation decisions, which have contributed to higher costs, reduced efficiency and poor investor returns.
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However, managers now seem to be getting to grips with the issues that have plagued the industry for so long.
Miners are now seeking out deals to boost growth and profitability
Over the past five years, the gold price has jumped 44%. Instead of repeating the mistakes of the past, gold miners are trying to capitalise on this growth with sensible deals.
Perhaps the most notable development was the merger of Barrick and Newmont’s operations in Nevada. In 2019 these two giants of the industry combined their operations in the state to create Nevada Gold Mines, the world's largest gold mining complex.
By acquiring rather than developing new assets, miners can take advantage of the market’s failings. If the equity market does not understand how much a company should be worth, that’s something purchasers can capitalise on.
That seems to be just what’s happening now.
The volume of mergers and acquisitions jumped last year. The largest was the $10.6bn combination between Agnico Eagle Mines and Kirkland Lake Gold. Meanwhile, Newcrest paid $2.8bn for Pretium Resources and Kinross Gold (NYSE: KGC) forked out $1.4bn for Great Bear Resources. The value of the top five gold mergers in 2021 totalled $16.1bn.
Canada’s Yamana Gold (LSE: YNGA) has become the latest miner to succumb to an offer. South African miner Gold Fields has agreed to buy the firm in an all-share deal valuing its Canadian peer at $6.7bn.
Under the terms of the agreement, Yamana shareholders will receive 0.6 Gold Fields shares for each share they hold, a premium of 33.8% to the average share price over the past 10 days.
Yamana investors will own about 39% of the enlarged company, which will have a $15.6bn market capitalisation. It will be the world’s fourth-largest gold producer with annual gold production of about 3.4m ounces. More importantly, the deal will enable the combined group to reduce costs by $40m a year and give it more clout when developing new projects.
There is scope for more deals as gold miners face growing pressure
Despite the recent flurry of deals in the sector, the gold mining industry is still highly fragmented, suggesting plenty of scope for more. The stable gold price is helping miners to offset rising costs and strengthen their financial positions. Better capital discipline over the past few years has also enabled miners to strengthen their balance sheets.
At the start of this year, S&P Global Market Intelligence noted that gold mining deals were likely to grow “as miners scramble for a shrinking number of producing assets to keep their pipelines full.” There are also “fewer options” for larger producers. As such, “gold asset scarcity will send larger miners out looking to swallow smaller players that are sitting on active mines and higher-quality projects.”
One company at risk of a buyout is Canadian miner Kinross Gold. The sale of the group’s Russian gold assets at a discount price has hurt sentiment. In London, Greatland Gold (LSE: GGP) is also one to keep an eye on. Its flagship asset is the world-class Havieron gold-copper deposit in Western Australia. Under development in joint venture with Newcrest Mining, the asset looks like a juicy target for Newcrest, which could move to buy out its partner.
Centamin (LSE: CEY) is one of London’s largest listed players. Its Egyptian assets are relatively low-cost and the company itself is in a very strong financial position with a cash-rich balance. What’s more, the stock is trading at a price-to-book (p/b) value of 0.9.
Fresnillo (LSE: FRES) is London’s largest gold miner, although it does look a bit on the pricey side at the moment. It might not be the first option for a buyout.
If I had to pick somewhere to invest, I’d say the smaller producers are much more likely to receive a bid as larger players try and consolidate the sector on the cheap. Pure Gold Mining (LSE: PUR) and Pan African Resources (LSE: PAF) both appear undervalued with growth potential. Pan African also yields 5.5%.
The stable gold price and growing demand for the yellow metal is supporting growth and deals in the sector. Investors may be able to capitalise on this trend by moving into gold miners.
With the outlook for the global economy becoming more uncertain by the day, building exposure to this sector could be a good way to reduce risk while also throwing in the potential for an upside windfall if a deal emerges.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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