Is bigger better?
What’s driving M&A in gold? Will it be good for the companies involved? Should mining companies be paying a premium when acquiring another mining? What about the alternatives to M&A? And how will this change the dynamic of the mining industry?
At Mines and Money Asia, a star-studded panel of gold miners and investors, moderated by Greg Fournier, Chief Executive, CIBC Hong Kong, attempted to make sense of the merger mania that has swept the gold industry over the last year.
George Fang, Senior Vice President of Zijin Mining, coming off the back of his successful Nevsun deal, was enthusiastic about M&A activity. Fang pointed out that gold M&A had the advantage of being of strategically important to Chinese mining companies.
Randy Smallwood, CEO of Wheaton Precious Metals was also positive about the recent mergers, viewing them as a form of growth for mining companies that couldn’t get equity growth, and with Barrick, the added benefit of a change in leadership. “We love this M&A stuff”.
However, Smallwood was however sceptical of the business case for M&A in royalty and streaming. “Why bother buying expensive royalty and streaming companies (on a Net Asset Value basis) when you can buy a stream?“
Not all panellists were keen on the recent M&A, with Peter Marrone, Executive Chairman, Yamana Gold, adding a note of caution. Marrone pointed out that although the recent mergers of Randgold/Barrick and Goldcorp/Newmont appeared to be smart transactions that made sound business sense on paper, there was a danger that the industry was getting carried away with mergers. “Bigger can be better but better is better.”
Would M&A and the resulting industry consolidation bring in generalist investors?
Andrew Ballingal, a veteran of the Hong Kong natural resource investor sector, noted that total market capitalisation of gold is US$300bn. That pales into insignificance when you consider that the US$ stock market is US$34trillion. Given that it wasn’t surprising that generalists aren’t interested in mining, not helped the poor track record of many mining companies “by and large majors haven’t been great stewards of investors’ capital”.
Steve Letwin, CEO, IAMGOLD echoed Ballingal’s concern on the shrinking market of funds and the lack of generalist investors. “We are meeting the same investors over and over again. The gold mining industry is in a self-funding mode. Investors want you to generate enough free cash flow so you can cover your costs, develop your assets.”
But what about the alternatives to M&A?
Peter Marrone argued that there were often better synergistic opportunities with JVs, having the advantage of being less combative. “You don’t need to always have a merger to create value.”
Andrew Ballingal was sceptical of shareholder activism. “If I don’t like the way a mining company is being run I try to discuss problems privately, or I sell the shares. If you get involved in aggressive activism it usually means that you have failed”.
On the question of should mining companies be buying others at a premium, there were some divergent views. Steve Letwin pointed that companies are allergic to paying a premium, with a precedent being set by the Barrick/Randgold merger. George Fang argued that whether or not a premium should be paid was really on a case by case basis. For Andrew Ballingal, however, the answer was more clear-cut. “As an investor we like premiums!”