Calm before a golden M&A storm?

Gold miner merger and acquisition (M&A) activity started 2023 with a bang. So far, we have seen the world’s largest gold producer, Newmont Gold, place a $17bn bid for Newcrest, and B2 Gold make a move on Sabina Gold & Silver. The Newmont/Newcrest proposition, if successful, will mark the largest takeover in Australian corporate history, and it looks to have marked the beginning of an exciting new phase for the gold market, in our view.

Over the last decade, the major gold producers have generally underinvested in exploration and development, which has resulted in a shrinking of their mine development pipelines and created an increased urgency to replenish their reserves through acquisition. The higher quality development assets that we favour have as a group been increasing their resources during this time and are likely targets for the major gold producers.

The development assets are also trading on cheaper NAV multiples versus the majors and carry the potential for a premium to be paid further down the line. This, in our view, creates a value opportunity in the large gold and silver development assets operating in Tier 1 jurisdictions (North America, South America, Australia).

The current M&A cycle arguably began in 2018 with the major mergers of Newmont/Goldcorp and Barrick/Randgold. Over the last five years we have seen higher deal volumes in the sector, with much of the M&A activity taking place between 2019-2021. Last year saw a reduction in activity, most likely in response to the initial surge in inflation and the uncertainty around future capex expenditure. However, last year could have marked the quiet period – the eye in the M&A storm.

As mentioned earlier, the major gold producers are facing a visible and unresolved “reserve cliff’’ after years of underinvestment. Even with the recent M&A activity, the gold sector remains fragmented when compared to other industries. Some of the major gold producers are looking to consolidate — which is the right move in our view. But ultimately, we believe that more major gold producers will look to consolidate in a meaningful way once the $ gold price clears $2,100/oz and the boards of these major producers are pushed by generalist investors to resolve their growth problems. The potential synergies from lowering costs and diversifying operations through acquisition may also motivate boards to act sooner rather than later.

A study of the 128 M&A deals since 2010 (see chart below) shows that over 70% of M&A transactions in the gold sector have been for assets acquired in the Americas and Australia. This is a clear sign that the majors and single asset producers are not only looking to increase their reserves, but also diversify geographical risk into well understood operational jurisdictions – a trend that is central to the investment thesis of our strategy.

That over two-thirds of the M&A activity since 2010 has taken place in less than a third of the world’s investable landmass reflects clearly why it is that we restrict our investment activity to these jurisdictions alone. We expect both the trend for greater M&A activity and a preference for Australia and the Americas to continue through the rest of this year and beyond.