Consolidation will continue in the gold sector, B of A says

A new report from Bank of America Securities puts the total deal value of global gold mergers and acquisitions last year at US$20.19 billion — the highest in nine years — with the senior producers mainly active as sellers and the mid-tiers as buyers, and the bank says it sees potential for further consolidation in the sector this year.

Years of underinvestment and rising pressure on production profiles are key factors. The global gold producers “face the daunting task of replenishing reserves mined,” the bank’s analysts note, and “mid-tier producers not involved in M&A risk being ‘left behind’ by their rapidly growing peers.”

An “unintended consequence of the non-core asset sales was to create larger, more liquid mid-tier gold producers coming to the attention of global gold investors,” the report states. “With more non-core asset sales on the table, this trend will likely continue in 2020.”

In addition, B of A points out that there are “too many midsize (US$0.5 billion to $US4 billion) gold vehicles with undifferentiated investment cases.”

According to the bank, acquisition prices last year, on average, relative to prevailing gold prices, “were at the lowest levels since 2013,” making it a good year to be a buyer.

“The average reserve price in 2019 for companies was US$1,132 per oz. — a steep 19% discount to the prevailing spot gold price at the time of the transactions,” the report states. “This was well below the historical median of -2.6% for company transactions over the prior 1998–2018 period.”

Of the 33 deals in 2019, 15 involved gold companies, six involved mines and 12 development projects. By contrast, of the 31 transactions in 2018, 16 involved companies, nine mines and six development projects.

“These were both well below the frenetic pace of deal activity levels in 2009–2012 (greater than 50 deals a year),” which the bank attributes to a gold price “that was well below the high levels of 2011–2012.”

Breaking down the years based on transaction values, 2019’s US$20.19 billion was double 2018’s US$10.46 billion, and significantly higher than 2017’s US$5.87 billion.

The US$10 billion all-share merger of Newmont and Goldcorp dominated 2019’s figures, while the US$6.1-billion, all-share Barrick–Randgold merger dominated 2018’s figures.

Drilling into the data further, companies based in Canada and Australia made up 68% of the 2019 deals, while mid-tier gold producers were buyers for 10 of the 14 company and mine transactions with reserves last year.

“In our view, an overarching theme was to become a +1 million oz. gold producer (Kirkland Lake, Northern Star, Evolution and Equinox), which could lead to a higher valuation multiple (maybe not),” B of A writes.

The bank also points out that the focus in last year’s deals, as in those in 2018, were reserve assets.

“For 2019, 58% of all transactions were for assets with reserves, lower year-on-year versus 70% in 2018,” the report states. “Since the nadir in 2011, when less than 40% of all transactions were for reserves only, the bias to reserve-only purchases has been in a steady uptrend.”

In terms of development project assets, 42% of the transactions last year were in production, compared with 60% in 2018.