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Here’s why the consolidation in the gold mining industry is far from over

Gold Resource Corp CEO Jason Reid said Barrick Gold’s play for rival Newmont signals M&A activity will snowball in the run-up to a perceived near-term bull market in precious metals
A big red fish eating up smaller fishes
DRDGOLD CEO Niel Pretorius said a potential deal, and 'the asset portfolio adjustments' that may follow, could set in motion 'a whole host of very exciting developments'

Barrick Gold Corp's (NYSE:GOLD) (TSE:ABX) unsolicited $17.85 billion bid for Newmont Mining Corporation (ASX:NEM) shows that mergers and acquisitions activity is heating up as miners race to acquire assts before a full-blown bull run, according to industry executives.

Gold Resource Corporation (NYSEAMERICAN:GORO) CEO Jason Reid said the rapid pace and escalation of mining deals signals that companies believe the industry is moving back into a bull market in precious metals.  

“Acquiring ounces before the bull market fully takes hold seems to be the strategy,” Reid told Proactive Investors. “Once the bull market is on solid ground, M&A opportunities will get expensive fast. The industry has been known to pay two to three times more for assets than they were worth during the last bull market. Many CEOs and management got fired for that not too long ago. The time to do M&A is well before the peak.”

READ: Barrick’s Bristow aiming to capture “missing billions” with hostile Newmont bid

Experts say it's time for miners to go on a shopping spree because there isn’t enough lead time for most of them to develop new projects to capitalize on the next bull market. 

“This is a calculated risk and opportunity for many companies to provide a growth story for shareholders,” said Reid.

Reid knows what he is talking about. Gold Resource closed four deals in 14 months to form the bulk of its Nevada Mining unit years ago during the last bear market. 

“During the next bull market, the price we paid for these assets, one of which is targeted to increase our near-term gold production by over 100%, will further enhance the accretive nature of these acquisitions,” said Reid. “To me, bear markets are for buying, and the recent M&A activity is behind the curve and should have taken place years ago.”

Ongoing Consolidation

Barrick’s unsolicited play for Newmont fits in with a pattern of ongoing consolidation in the gold industry, highlighted most recently by the absorption of Randgold into Barrick. Gary Goldberg, Newmont’s chief executive, meanwhile, said his company wants to focus on completing its own big deal, a $10 billion proposed acquisition of its Canadian rival, Goldcorp Inc (TSX:G).

A Barrick-Newmont deal would create a company valued at $42 billion. Such an industry giant, according to Barrick, will be better able to squeeze out costs. Barrick said a tie-up would create opportunities to squeeze out more than $7 billion in cost savings.

“This is an industry that places a high premium on growth, and it’s what its investors expect and demand,” said DRDGOLD CEO Niel Pretorius. “Mature companies or companies with mature assets that are unable to grow organically or grow earnings through optimization of existing portfolios, are increasingly having to look at corporate activity to deliver the growth.”

DRDGOLD Limited (NYSE:DRD) (JSE:DRD), one of the oldest continuously listed miners on the Johannesburg Stock Exchange, recently acquired gold and platinum miner Sibanye-Stillwater’s West Rand Tailings Retreatment Project (WRTRP).

According to analysts, the acquisition transforms DRDGOLD in one stroke, giving it a platform from which to grow aggressively into Africa and other commodities. It also cuts overhead unit costs through increased production and puts an end to DRDGOLD’S single asset operating risk. The new West Rand crown jewel virtually doubles the miner’s gold reserves, giving it immediate access to facilities that can generate cash in a matter of months.

No threat to the industry

Would a Barrick-Newmont deal face regulatory hurdles? As Proactive Investors reported Tuesday, that’s unlikely. Even though a Barrick-Newmont combination would create the world’s largest gold company, it would still account for less than 20% of the market.

“I could see how this could make a few boards and executives nervous," said Pretorius. "However, ultimately, it’s the shareholders that matter, and they must be thinking, ‘Is this Randgold on a much larger scale?’” 

Other mining companies wonder how the potential behemoth will operate. 

“I don’t see it as a threat to the industry,” said Reid. “The larger a group is, the more difficult it is to really be efficient. Take governments for example. If anyone can pull it off, I would imagine Mr Bristow can do it, but it’s a tall order. Barrick and Newmont weren’t known for their efficiencies as stand-alone large companies prior to this potential merger. It’s hard to image why this merger will make them efficient as a mammoth entity.” 

READ: Gold Resource touts seventh consecutive year of profitability; updates mineral reserve at Oaxaca once again

Smaller companies in the mining space offer examples of efficient operation. Gold Resource, for instance, has been profitable for more than seven years now, and four of those years were during brutal bear markets. A lot of the large mining companies haven’t had the same fortune with red on their balance sheets.

Still, industry executives expect the shopping spree will likely snowball in the run-up to a bull market.

“Expect to see more M&A activity in the mining space until metal prices increase to a point where deals get too expensive and no longer look attractive or the perceived near-term bull market changes course,” said Reid. “The latter I think is unlikely.”     

According to experts, Barrick’s bid for Newmont could free up a group of assets the combined company would no longer consider key, such as the Kalgoorlie super pit 50/50 joint-venture in Western Australia.

“This deal and the asset portfolio adjustments that may follow could set in motion a whole host of very exciting developments,” said Pretorius.

Contact Uttara Choudhury at [email protected]

Follow her on Twitter@UttaraProactive 

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