With gold prices at a record high, mining companies are back
hunting for deals while trying to reassure investors that they’ve learned from
past mistakes of overspending.
There has been a flurry of activity in recent months, with
Gold Fields Ltd.’s $1.6 billion purchase of Osisko Mining Inc. and AngloGold Ashanti
Ltd.’s $2.5 billion acquisition of Centamin Plc. That has sparked
speculation over what could be next, with signs that more companies are working
to ink deals.
Bullion’s rally and easing cost pressures have made assets
more appealing, especially for those seeking to replace aging mines. Yet
companies are signalling they’re wary of repeating errors made in a previous
bull market when mega expansions left them with big debts and angry
shareholders.
At an industry gathering in Colorado Springs this week,
executives sought to show discipline by talking up the virtues of cutting debt,
controlling costs and rewarding investors rather than the prospect of more
M&A.
“There were some really stupid deals made last time
around,” Ross J. Beaty, chairman of Equinox Gold Corp., said in an
interview at the Denver Gold Forum. “Companies bought dumb stuff and
were penalized for it.”
Equinox itself has drawn interest, receiving takeover offers
since starting production at the new Greenstone project in Canada this year,
Beaty said. He’s concerned about a hostile approach and warned that the $2.6
billion company is “certainly not for sale.”
There have been other efforts behind the scenes. Top
producer Newmont Corp. in July said it got dozens of bids for assets it’s selling in North America and Africa, while
Osisko said Gold Fields competed against other firms for the company.
Deal appetite has picked up as gold soared to successive records on the outlook for lower
US interest rates, central-bank buying and haven demand. Prices topped $2,600
an ounce for the first time on Wednesday as the Federal Reserve kicked off an easing cycle by lowering borrowing costs
by a half percentage point.
Inflationary pressures have eased in the past year, too,
helping the industry to keep costs in check, make more cash and boost share
prices.
Still, ill-fated deals of the past are a reminder of the
risks of overspending. After splashing out on big expansions that saddled
companies with debt, generalist investors were spooked when the end of a
bull run in prices more than a decade ago hurt balance sheets.
To entice investors, miners are trying to show that they
won’t make a similar mistake this time.
Equinox plans to use profits to reduce debt it used to build
its Greenstone mine. And B2Gold Corp. is focused on “returning as much as
we can to shareholders by increasing cash flow and paying out a decent
dividend,” Chief Executive Officer Clive Johnson said in an interview at
this week’s forum.
There has even been some criticism of recent deals from
within the industry. Barrick Gold Corp. CEO Mark Bristow called Gold Fields’
deal for Osisko — which represented an almost 67% premium to the share price
the day before it was announced — “concerning.”
“These are markers of exuberance in the market,”
Bristow said, adding that he won’t pay any premiums for acquisitions. Unlike
other senior rivals, his company hasn’t announced a major deal in recent years.
Deals offer a way to tap deposits that are incredibly hard
to find. While copper and iron ore mines can last for decades, or even a
century, most gold mines have a shorter life span.
“While consolidation is a good, healthy sign for the
industry, you still have to see how the newly formed entity can execute,”
said Wasif Latif, a portfolio manager at Sarmaya Partners. “History shows
that, generally, mergers and acquisitions aren’t accretive over time.”
Latif favors investing in companies that show how they’ll
control their costs and have a robust portfolio of projects they can build
themselves.
“Energy companies also experienced the same pain after
the last commodity cycle collapse, but they found religion,” he said. “They
said, ‘Ok, we get it, we’re not going to just dig a hole whenever we see one.’
Some gold miners are still figuring that out.”
