Consolidation Is the Next Step for Gold Miners as Discoveries Dry Up

Consolidation is the new buzzword in the gold mining industry as miners look for ways to increase production and reduce costs. Barrick Gold [stock_market_widget type="inline" template="generic" color="default" assets="ABX" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] and Newmont Mining [stock_market_widget type="inline" template="generic" color="default" assets="NEM" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] have grabbed the headlines of late thanks to their Nevada joint venture, but that’s not the only major development to have taken place.

Barrick has completed the acquisition of Randgold Resources, while Newmont is in the process of acquiring Goldcorp. Apart from these two major deals valued at a combined $16.5 billion, there have been quite a few smaller deals as well. For instance, Australian miner Newcrest just announced that it is spending $806.5 million to acquire a 70% interest in the Red Chris gold and copper mine in British Columbia, Canada.

So, why are these companies spending millions on mergers and acquisitions when they could have spent the same on new discoveries?

Discoveries are Drying Up

Gold exploration costs have shot up 60% in the last 18 years to $54.3 billion. But the spending boost hasn’t led to a corresponding increase in gold discoveries.

Funds spent on gold exploration have shot up 60% in the last 18 years to $54.3 billion. But the spending boost hasn’t led to a corresponding increase in gold discoveries. Over the past 10 years, only 41 gold discoveries have been made, which has resulted in around 215.5 million ounces of the yellow metal being discovered.

By comparison, gold miners have recorded a total of 263 major gold discoveries since 1990, and most of these were made in the 1990s. So, gold miners have witnessed a slowdown in the pace of gold discoveries despite splashing out more money. This has turned out to be counterproductive as the capital outlay has pressured balance sheets and forced miners into taking on debt.

Focusing on Synergies

As such, it looks like miners have now realized that it is best to spend money on mergers, acquisitions, and bolt-on acquisitions. This way, miners can realize synergies with respect to costs and boost production at the same time.

For instance, Barrick and Newmont’s Nevada joint venture is expected to deliver annual pre-tax synergies worth $500 million in five years. But that’s not the only benefit as Barrick and Newmont estimate that the JV will create pre-tax net present value of $5 billion over the next two decades.

Not surprisingly, industry watchers believe that M&A activity in the gold mining industry won’t be dying out anytime soon. There are two reasons why this looks like a strong possibility – higher gold prices and depletion of gold reserves.

The increase in gold prices over the past few months has given miners the confidence to go out and make acquisitions. Moreover, MinEx estimates that the global gold mining output could halve within the next decade. This will create a massive demand-supply gap that will further boost prices.

In such a scenario, gold miners are doing the right thing by looking to reduce costs and strengthen the production profile by way of consolidation. As such, investors with an interest in gold miners can expect further consolidation in the future, as this presents a logical way of boosting shareholder value.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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