Scotiabank speculates on next round of likely gold mergers, with Kinross, Yamana, high on the list

The ongoing trend of mergers in the gold sector is expected to continue this year with companies like Kinross Gold (TSX: K; NYSE: KGC), Yamana Gold (TSX: YRI; NYSE: AUY; LSE: AUY), Centerra Gold (TSX: CG; NYSE: CGAU) and OceanaGold (TSX: OGC; ASX: OGC) “most likely” to participate in the latest round of consolidation, according to Scotiabank analysts.  

In a new report released this week, entitled “Two to Tango: Looking for (Merger) Dance Partners in the Gold Space,” the bank’s researchers proposed a list of ten combinations that it believes could create value for shareholders.  

“While we think these proposed combinations make sense, we expect many of them won’t occur because all the stars need to be aligned for a deal to be reached,” said the report.  “That said, we believe Kinross Gold, Yamana Gold, Centerra Gold and OceanaGold are particularly likely to participate in major strategic transactions.”  

The gold sector has seen at least eight notable consolidations since 2018, when Barrick Gold (TSX: ABX; NYSE: GOLD) and Randgold Resources announced an $18 billion all-share merger.  

A merger between Barrick and Kinross, which could potentially create the world’s largest gold producer with 10 Tier 1 assets is on top of the list. Kinross would own 14% of the company and the merger could improve the company’s balance sheet, strained due to its acquisition of Great Bear Resources and its decision to sell operations in Russia.  

For Barrick, the deal would add two more Tier 1 assets, Paracatu in Brazil and Tasiast in Mauritiana, to its portfolio with a potential for a third in the Dixie project in the Red Lake mining district in Ontario and increase its presence in Canada, an aspect that the company’s CEO said it was focused on in its recently released annual report.  

“After suspending operations at its Russian assets, we expect KGC to make a strategic pivot,” the report said. “The company could be an attractive target for other senior producers (particularly because of its low valuation and multiple Tier 1 assets).” 

The report also explores a merger between Kinross and Yamana with the former owning 57% of the combined company. Scotiabank analysts say this “could create a leading Americas-focused senior producer with strong growth and exploration upside in Canada.”  

The merger would leverage “existing assets in South America (Chile/Brazil) and North America (Canada) to create a top-five global gold producer” with a yearly production of more than 3 million oz. gold at about $1,150 per oz. all-in-sustaining cost, said the report. The merger though could be dilutive to Kinross on most financial metrics and would add some Africa exposure to Yamana shareholders.  

“We think Yamana Gold could be attractive to multiple suitors because of its clean, Americas-focused portfolio, including a growing presence in Canada; it is one of very few mid-tier companies to hold a world-class gold asset (50% stake in Canadian Malartic),” said the report.  

The analysts also find potential for a merger between Yamana and Newcrest Mining (ASX, TSX: NCM; ASX: NCM) as that would help Newcrest, which would own 76% of the merger, achieve its strategy of growing in the Americas by adding up to four Tier 1 assets from Canada, Brazil and Chile to its portfolio.   

The deal, however, could be dilutive to Yamana shareholders on “several financial metrics” and may need a premium.  

A merger between Centerra and Eldorado Gold (TSX: ELD; NYSE: EGO), in which Centerra would own 51% of the company, could create a “low-cost, long-life portfolio in North America and Europe.”  

There could also be “potential synergies from overlapping geographies” since the key assets of both companies are located in Turkey and Canada. Centerra could also deploy its “excess cash” in the construction of Eldorado’s Skouries project in Northern Greece.  

Centerra is “cash-rich but lacks significant near-term growth and therefore could look for potential partners that provide additional growth that it could help to fund,” said the report.  

However, Centerra’s dispute with the Kyrgyz government may be an obstacle to the merger. In addition, Eldorado has other financing options for Skouries and may not want to participate till it further de-risks the project.  

The report also links Centerra with OceanaGold as the merger could create “a sustainable mid-tier producer with a very strong cash-rich balance sheet.” Centerra would own 57% of the merged entity, which would have six operating mines across the globe.  

The combined company could benefit from a higher strategic profile with strong balance sheet, potentially translating into higher valuations, analysts said.  

The other potential merger combinations mentioned in the list include: Gold Fields (NYSE: GFI) and AngloGold Ashanti (NYSE: AU); Franco-Nevada (TSX: FNV) and Wheaton Precious Metals (TSX: WPM; NYSE: WPM); Triple Flag Precious Metals (TSX: TFPM) and Sandstorm Gold (TSX: SSL; NYSE: SAND); Torex Gold Resources (TSX: TXG) and Dundee Precious Metals (TSX: DPM); and OceanaGold and Dundee.  

All the mergers explored in the list have been considered as zero-premium deals since analysts believe these kinds of deals are more likely to generate positive value. Of the eight notable mergers since 2018, the share price returns for the zero-premium deals were higher than those deals that involved including a premium.  

“It is often difficult for acquirers to generate enough value from synergies to overcome upfront premiums paid,” said the report.