Room at the top

At the beginning of April this space was given over to an editorial entitled “Consolidation, or not,” which questioned whether there was much consolidation left to be done in the gold industry. Within an hour of our placing that column, Iamgold and Wheaton River Minerals announced their plan to merge.

We could protest, long after the fact, that we had been talking about the gold industry’s upper reaches, and asserting that takeover time was over among the largest gold producers. But we should probably just practise world-weary grins and buy the next round of drinks as penance. In the mining business, deal-making never actually dies.

We will stick our heads up and say, though, that the present round of merger proposals is different from that of the late 1990s, precisely because the smaller companies are the ones jumping in. And they are generally jumping in by proposing arrangements far more like a merger-of-equals than a takeover.

What the apostles of consolidation rarely consider is that commodity industries are rarely ones where market share either means a lot or can readily be expanded. Big natural-resource companies are not big because consumers prefer BP’s gasoline or Rio Tinto’s zinc, or even because consumers liked the old Shell commercials with the cars crashing through paper barriers; they are big because they have developed large economic reserves of the commodities they sell. Others can do that too; some do; and they get big, like Barrick did in the gold business.

Or the smaller players can try to merge their way up the steps, as Kinross Gold did in its merger with Echo Bay and TVX Gold. That appears to be the strategy behind the Iamgold-Wheaton merger, and behind the bids by Golden Star and Coeur d’Alene to break that merger up. Equally, that could apply to the merger of Aur Resources and Inmet Mining in the copper business.

When that happens, bigger is not always better; we keep talking about Alan Carter’s concept of the “scale trap,” where the largest companies find there are very few new mineral deposits large enough to make an impact on their business. Once getting bigger deprives a company of the chance to develop any profitable new project that comes its way, getting bigger may be a cost rather than a benefit. And the company may be sure that someone else will come along to develop that profitable new project. That someone else will be someone smaller. And that someone else will get bigger too, on the earnings from the project the big guys wouldn’t take on.

So it seems futile to hold to the hope that, if they get big enough, the large established gold companies will ultimately have no competition. But then if oligopoly isn’t the point of consolidation, what is?

Cost reduction through synergies is often quoted as the answer to that, but efficiency, whatever management gurus may try to tell us, is not a bottomless well. There is strong evidence that significant costs were taken out in some of the industry’s bigger mergers — Barrick’s takeover of Homestake, for example — but efficiencies once found don’t always reappear in the next takeover.

We won’t be so foolish as to say consolidation has come to a halt. Maybe it’s better to see the industry as a bucket that fills as quickly as anyone tries to empty it.