Consolidation, or not

After the great shakeout of the late 1990s, consolidation became a bit of a mantra among executives in the gold industry. There were really too many gold companies, the story went, and some merger and acquisition activity would tighten up that loose world.

The unstated premise was that somehow knocking out a few smaller players would allow the ones left standing to control production, and maybe turn from being price-takers into price-makers. The dreams of oligopoly, though, fizzled fairly quickly — and with the turnaround in the gold price, the idea now seems pretty quaint anyway.

But the financial sector, and some of the scribes who watch it, have never really got away from the golden hope of consolidation, and it remains dear enough to some that it’s not hard to get rumours going.

Thus it was that speculation began to mount that Newmont Mining might take a run at Barrick Gold, to create — wait for it — yet another World’s Largest Gold Producer.

The apparent theory is that Barrick’s share price is depressed, thanks to the market’s dislike of large hedge books. Newmont’s shares are highly rated, because the company is seen as the standard-bearer among the non-hedgers. The difference in market ratings makes a paper bid for Barrick a potential winner.

All of that is reasonable enough. Barrick’s shares have certainly not rocketed like those of the other Toronto-listed golds — though the other big gold miner, Placer Dome, has also lagged the Toronto gold group. But does that make Barrick a bargain?

We’ve banged on about this before, but closing out hedge books when they are underwater costs money. So do takeover bids; there is a premium to be paid whenever one company takes a run at another. That lesson, we suspect, hasn’t been lost on the corner offices in Denver, Toronto, and Johannesburg, because experience is a great teacher, and sometimes an expensive one.

The gold-industry mergers of the past few years have provided a whole string of examples. The most recent is the merger of AngloGold and Ashanti Goldfields, which is supposed to refinance Ashanti and wipe away the memory of the company’s bad hedging deals. Another is Placer Dome’s takeover of AurionGold, which significantly changed the balance in Placer’s hedge book.

Hedgers, especially strongly committed ones, have probably found non-hedgers and moderate hedgers a little easier to swallow; witness Barrick’s takeover of Homestake Mining. Partly because new hedges can always be bought, but perhaps more because the gold market’s tide has run against the hedgers in recent years, making a decent-looking hedge book out of two different ones has been less of a strain.

There remains the other issue, that of valuation. When consolidation talk was at its loudest, prices were low. Now that the gold price has recovered — and gold equities have been whipsawed skyward — some gold companies are looking positively expensive. That, too, is a lesson the men with the nice views will have digested.

But merger junkies need not give up hope. Norilsk Nickel has bought the 20% interest in Gold Fields previously held by Anglo American; the Russians are coming, the Russians are coming — and they’ve got their chequebooks.