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Gold mining deals seen rebounding on price discount
By Liezel Hill
Bloomberg News
Wednesday, January 8, 2014
http://www.bloomberg.com/news/2014-01-08/gold-mining-deals-seen-reboundi...
TORONTO -- Investment bankers see gold-mining deals rebounding this year from a near-decade low as producers target assets at fire-sale prices after the metal plunged.
Gold-mining companies are close to their cheapest relative to book value in at least two decades, according to data compiled by Bloomberg. Meanwhile producers will be enticed to replace some of the output lost when they sold or curtailed less-profitable mines, said Barclays Plc's Paul Knight.
"Majors who have done portfolio optimization will look at some of the juniors and say, 'Here's a chance for us to acquire a potentially better asset than we've sold and to mitigate the loss of production,'" Knight, a Barclays vice chairman and co-head of global metals and mining, said Jan. 6 by telephone.
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There were $10.1 billion of deals involving gold producers last year, according to data compiled by Bloomberg. That's 4.4 percent less than in 2012 and the smallest since 2004.
While gold deals declined, there were signs of a resurgence of activity in December as the value of transactions reached the highest monthly level since February. Goldcorp Inc. and Newmont Mining Corp., the second- and third-largest producers by market value, said in September they were evaluating the potential for deals to add low-cost operations.
Single-project developers such as Pretium Resources Inc. and Torex Gold Resources Inc. may be attractive to larger companies, according to Adam Graf, a New York-based analyst at Cowen & Co.
Pretium's project in British Columbia has high grades, which will probably make it attractive to larger miners, Joe Ovsenek, the company's chief development officer, said by phone. The Vancouver-based company is focused on developing the mine, he said. A spokeswoman for Toronto-based Torex didn't respond to e-mails or phone calls seeking comment.
The larger miners may be better positioned to consider acquisitions than in 2013 after cutting costs. The 10 biggest producers by sales, led by Barrick Gold Corp., may generate combined free cash flow of $4.17 billion this year, compared with a negative $1.74 billion in 2013, according to analysts' estimates compiled by Bloomberg. That would be the highest for the group in at least eight years, the data show.
"With top-down cost reductions in 2013, producers have shown ability to adjust to a changing gold price environment," Credit Suisse Group AG analysts Anita Soni and Ralph M. Profiti said in a note yesterday.
At the same time, exploration and development companies, which generally rely on regular financings if their projects aren't yet generating revenue, may have more incentive to sell themselves.
The Standard & Poor's/TSX Global Gold Sector Index lost almost half its value last year as the metal fell the most in more than three decades. As investors pulled out of the industry, explorers and mine developers struggled to sell shares. The group's reported cash balance has dropped about 30 percent since 2012, while share sales by gold companies fell to the lowest since 2005, according to data compiled by Bloomberg.
"Companies whose access to capital has been cut off because of the current market sentiment will be compelled to consider mergers to conserve cash and survive until conditions improve," Michael Faralla, head of global mining investment banking at Toronto-Dominion Bank, said in an e-mailed response to questions. "Some of these companies may also elect to put themselves up for sale."
Many miners may not find buyers. Some companies with good deposits and management will emerge as "winners" while others will be challenged as the industry gets smaller, said Joe Wickwire, who manages more than $1.5 billion at Fidelity Investments, including the Select Gold Portfolio.
"Darwinism is alive and well in the gold industry right now," Wickwire said by phone last month. While ultimately there will be fewer companies producing less gold, "the profitability of the industry is going to go up."
To be sure, the appetite for gold M&A will be tempered by high levels of debt and a newfound emphasis by the largest producers on returns rather than growth, said Neil Gregson, a London-based fund manager at JPMorgan Chase & Co.
"Lots of things can be done, but there are not that many consolidators around, and of course everyone thinks their share price is too low to use," Gregson said by phone. "There's not that many ready buyers."
Deals with low-to-no premiums such as mergers of equals "could make a lot of sense," because they give companies a way to transform their businesses, reduce costs and strengthen balance sheets, said Matthew Hind, the Toronto-based head of Canadian metals and mining investment banking for Credit Suisse.
The industry's largest companies also may take steps to become more diversified into other commodities, according to Hind and Barclays' Knight.
Recent signs of a possible upturn in dealmaking include Asanko Gold Inc.'s Dec. 17 agreement to buy PMI Gold Corp. Another came the day before when Primero Mining Corp. said it agreed to buy Halifax, Nova Scotia-based Brigus Gold Corp. for about C$287 million ($265 million) including debt.
The Primero acquisition will give the Vancouver-based company a gold mine and a development project in Ontario, while Brigus will get access to funding to repay debt and finance its operations, the companies said.
Newmont's Search
"We don't expect the capital markets to ride to the rescue of everyone," Peter Myers, head of investment & corporate banking, Canada and International, at Bank of Montreal, said in an interview in Toronto. "Ultimately the sector has to take care of itself."
Newmont Chief Executive Officer Gary Goldberg said on Sept. 24 the largest U.S. gold producer was searching for acquisitions to add low-cost gold or copper output after asset valuations fell. Goldcorp continues to evaluate potential deals, CEO Chuck Jeannes said the same month.
Omar Jabara, a Newmont spokesman, declined to comment. Jeff Wilhoit, a spokesman for Goldcorp, said Jeannes wasn't available to comment.
"We'll see activity in the gold sector increase regardless of what happens with the gold price," Mike Boyd, the head of global M&A at Canadian Imperial Bank of Commerce, said by phone. "People will want to pursue consolidation and try to drive down their cost structures."
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