Yellow metal's prices, sector pressures spur deals
Kinross Gold's [NYSE:KGC] USD 1.4bn acquisition of Great Bear Resources highlighted a significant shift in the premiums being paid for gold companies. The deal, completed 24 February, helps shore up Kinross's future production but included a surprising 40% premium to Great Bear's 20-day volume-weighted average price.
Precious metal mining deals from roughly 2015, when the price of gold cratered, until 4Q21 usually involved little or no premium paid out for the targets. Majors were suddenly being measured by profitability instead of pure production, leading them to clean up their balance sheets, hold off on dealmaking and invest in only their lowest-cost assets. Last quarter, after more than two years of solid gold prices, replenishing reserves started to take precedence and many corporate acquisitions in 4Q21 logged by Dealogic had a premium north of 20%. Demand was strong and cash became abundant.
“There is a lot of pent-up demand – and a lot of need to bulk up,” a sector banker says.
The price is right
Historically, a correlation exists between higher gold prices and bigger mergers and acquisitions in the precious metals space.
Big aggregate deal values in 2006, 2010, 2019 and 2021 all came in conjunction with or shortly after gold prices saw sustained increases. Gold prices approached USD 1,900 per ounce at the end of 2020 after which deals topped USD 20bn in 2021, according to Dealogic data. That total was buoyed by the Kinross-Great Bear deal, as well as Agnico Eagle Mines' [NYSE:AEM] USD 10.5bn merger with Kirkland Lake Gold and Newcrest Mining's [ASX:NCM][TSX:ACM] USD 2.7bn acquisition of Pretium Resources.
But bull markets for bullion may not immediately translate into M&A. For example, gold prices have climbed since Russia invaded Ukraine but the same geopolitical unrest that led investors to put money into the perceived safety of physical gold could make companies leery about M&A, cautions the banker.
Digging in
With those in the gold sector loosening the purse strings in response to strong gold prices – north of USD 1,900 an ounce currently – 2022 could yet become another strong year for M&A. The slowdown in dealmaking in recent years had a trickle effect, with producers' decisions not to acquire developers affecting developers' willingness to acquire explorers. Movement should come throughout the mining cycle.
Some attention could fall on deposits offering multiple metals, as base metal pricing is climbing in response to demand caused by the energy transition. Copper-gold porphyry deposits held by explorers such as Seabridge Gold [NYSE:SA] and Western Copper and Gold [NYSE:WRN] have the potential to be sizable mines. Sabina Gold & Silver [TSX:SBB] has assembled a financing package to develop its flagship project, while earlier stage explorers such as US Gold Corp [NASDAQ:USAU] and Fury Gold Mines [NYSE:FURY] also have assets with high upsides.
Many of the largest gold producers have made deals in the past two years to shore up production, with Yamana Gold [NYSE:AUY] the exception. Yamana typically shies from making large acquisitions as it has the pipeline of projects in development to avoid a production drop-off, notes the banker. Instead, the next tier of producers could seek mergers or developer acquisitions to scale up, the banker predicts, tipping Argonaut Gold [TSX:AR], Torex Gold [TSX:TSG] and Victoria Gold [TSX:VGCX] as possible parties to deals.
