Gold All That Glitters for Mining's M&A Bankers Amid Turmoil

  • Current climate seen only every 15-20 years, Sibanye CEO says
  • Tahoe bought Lake Shore Gold in C$945 million deal this week

Mining industry bankers still smarting from the worst year for acquisitions in more than a decade can take consolation from the prospect of a once-in-a-generation opportunity for deals among gold producers in 2016.

“The scale of this opportunity doesn’t come around very often, maybe every 15, 20 years,” Sibanye Gold Ltd. Chief Executive Officer Neal Froneman said in an interview in Cape Town. He’s seeking deals to turn the biggest miner of South African gold into one of the top five global producers of the metal.

“For a few years there has been no visible external action but I think we’re right on the cusp now,” Froneman said. “We’ll see an increase in M&A activities, especially with companies having liquidity issues.”

The odds of more gold deals are being boosted by unusual industry conditions, as rising prices for the metal on demand for a haven from market turmoil combine with the need of diversified miners to sell assets to pay down debt. Gold’s 14 percent jump in 2016 is already spurring transactions. Tahoe Resources Inc. this week agreed to acquire Toronto-based miner Lake Shore Gold Inc. in a C$945 million ($680 million) all-share deal.

After last year’s deal-making drought, a turnaround would be welcomed by many, including banks hoping to benefit from millions of dollars in fees from acquisitions.

The value of mining and steel transactions fell to about $56 billion last year in more than 800 completed deals, from $98 billion the year before, according to data compiled by Bloomberg. That was the lowest level in more than a decade.

Exchange rates are also favorable for M&A in some regions, with the drop in South Africa’s rand boosting profits at domestic gold producers who pay costs largely in the currency while selling the precious metal for dollars. The Canadian dollar has also weakened.

“I see a window of high activity in the gold space,” said Raj Khatri, head of metals and mining for Europe at Macquarie Group Ltd. in London. “The key drivers behind this has been the uptick and recovery in the gold price fundamentals coupled with local currency benefits in certain regions. This will lead to stronger players being able to take advantage of more vulnerable competitors.”

Currency Advantage

Harmony Gold Mining Co., a Johannesburg-listed company that said Feb. 4 it was seeking acquisitions, has more than doubled in value this year. Sibanye is up about 80 percent and AngloGold Ashanti 55 percent. That’s given such companies the “currency” to go ahead with purchases outside of their home country, according to Sibanye’s Froneman.

“If they can use the very strong cash flows they’re currently generating to buy some decent assets, then they should go for it,” said Andrew Lapping, deputy chief investment officer of Allan Gray, which oversees about $28 billion of assets in Cape Town. “It’s a good time to be a buyer. Not many companies have money to spend at this point.”

Canada’s weak dollar helped underpin the economics of Tahoe’s deal for Shore Gold. The currency has lost about 16 percent against the U.S. dollar in the past 12 months, lowering costs for mines operating in Canada and making them more attractive to foreign buyers.

One brake on deal-making may come from shareholders unwilling to see stock diluted and wary of a new buying spree so soon after the decade-long investment binge that’s left the broader mining industry indebted, drowning in supply and seeking cash from equity sales.

Hitting Brake

“The test is going to be now, with this pickup in the gold price and the absolute confusion around the global economy and watching everyone suddenly rush back to gold and gold equities, whether we are going to see a whole lot of board deals and massive dilution of shareholder value,” said Randgold Resources Ltd. CEO Mark Bristow, who built the African gold mining business through a series of successful acquisitions.

Yet with gold the best performer on the Bloomberg Commodities Index of returns on 22 raw materials this year, investors piling in to exchange-traded products backed by bullion at the fastest pace since the financial crisis in 2009, and currency rates beneficial, the planets may be aligning for the most acquisitive operators.

“There is in the gold sector slightly different drivers of the gold price to the broader global economic package that we see driving base and bulk prices,” Lee Downham, global mining transaction chief at Ernst & Young LLP in London, said by phone. “It’s easier to justify a gold deal and therefore it tends to get through and happen more regularly.”

Before it's here, it's on the Bloomberg Terminal.