Gold Mining Companies: A Bonanza for M&A

A modern-day gold rush is under way as mining companies buy each other at a record pace. Kinross Gold's (KGC) Aug. 2 purchase of Red Back Mining for about $7.1 billion brought the value of gold deals to $32 billion this year, according to data compiled by Bloomberg. That's more than twice the 2009 total. The 260 transactions so far this year account for 38 percent of all mining takeovers by value.

The dealmaking amounts to a bet that the price of gold is headed higher. Bullion hit a record $1,266.50 an ounce in June and is set for a 10th straight annual gain, the longest winning streak since at least 1920. Bank of America's (BAC) Merrill Lynch unit expects the price to reach $1,500 an ounce by the end of 2011. "If you have a view that the gold price is strong and is going to go higher, then acquiring more reserves or producing properties today makes sense," says Greg Fournier, Merrill Lynch's head of metals and mining investment banking for Asia.

The biggest deal of 2010 has been KazakhGold Group's $11 billion bid to take over its parent, Polyus Gold (OPYGY). While elevated valuations and restricted access to loans may reduce the appetite for takeovers in the remainder of the year, the consolidation trend is likely to continue. Gold discoveries have been dropping at a rate of 4 million ounces a year for the past three decades, while demand for the precious metal continues to rise. Companies "are under pressure to continue to buy or find gold to replenish the production pipeline," says Richard Phillips, managing director of Greenhill Caliburn. Melbourne-based Greenhill is advising Lihir Gold (LIHR), a Papua New Guinea company that is the target of an $8.9 billion takeover by Australia's Newcrest Mining, the second-biggest gold acquisition this year.

China, already the No. 1 gold producer, is on the hunt for new acreage. In an Aug. 3 statement, the country's central bank said it "will place heavy emphasis on supporting large-scale gold producers in their development and overseas expansion" by means of loans and credit lines.

Heavyweights such as Newmont Mining (NEM) of the U.S. and Canada's Barrick Gold (ABX) have also said they are in the market for acquisitions. "It's a real chest-beating industry," says Grant Craighead, managing director of Sydney-based research company Stock Resource. "There's always a battle of the elephants with gold companies. They like to be the biggest." Size matters, of course: Larger firms have an easier time financing deals.

The spike in mining M&A has been a boon for a few banks. Bank of Montreal's BMO Capital Markets remains the leader with nine transactions worth $20 billion, according to Bloomberg data. That's followed by HSBC (HBC) and Merrill Lynch. Merrill's Fournier seems confident that more deals are in the pipeline: The larger players "will continue to be pretty active buying smaller companies, and potentially we'll see some mergers of some of the senior companies at some point in time."

The bottom line: Gold prices are headed for a 10-year streak of gains. That has spurred a frenzy of dealmaking as companies try to lock up reserves.

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