Rush of gold mining M&A reflects a return to ‘bigger is better’ thinking

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The world’s biggest gold miners have done a 180.

After the failure of past blockbuster mining deals, such as Barrick Gold Corp.’s $7.3-billion purchase of copper producer Equinox Minerals Ltd. in 2011, the industry mostly abandoned size as a measure of success, in favour of profitability. Over the past seven years, Barrick and others preached the gospel of the need to generate free cash flow, rather than increase production.

But all of a sudden, the “bigger is better” mantra is back.

This time around, deal making among the world’s biggest gold companies is being spurred at least in part by the need to be as big, liquid and as geographically diversified as possible, to appeal to a wider investor base.

Just last week, Barrick announced it was going after Colorado-based Newmont Mining Corp. with a “once in a lifetime” US$17.8-billion hostile offer. Barrick said the creation of a megaminer with a projected market value of US$42-billion will help bring generalist money managers back into the gold sector. The move on Newmont comes not long after Barrick closed its own US$6-billion acquisition of Africa-focused miner Randgold Resources Ltd.

Newmont on Monday rejected Barrick’s offer, recommending that its shareholders instead support Newmont’s agreement to acquire Vancouver’s Goldcorp Inc. for US$10-billion.

A major part of the desire for senior miners to get bigger again is because of a fundamental change in the type of investors who own gold stocks today compared with a decade ago.

The bigger you are, the more investors you attract, said Jon Case, precious metals portfolio manager with Sentry Investments in Toronto.

In 2009, a head of a gold company could easily walk into a fund manager’s office and make a case for an investment based on a sales pitch. But post-2011, active managers largely abandoned the gold sector after the price of bullion collapsed and one mining firm after another took writedowns on disastrous acquisitions. Nowadays, gold stocks are largely bought and sold by passive index funds via algorithmic trading, which cuts human interaction out of the equation.

“We have billions of dollars that have left the stage and gone into [ETF] indexes,” Sean Roosen, chief executive officer of Osisko Gold Royalties, said in a speech last year in Toronto.

“You can’t meet up with a quant trader or computer and say ‘I’ve got this great idea, I think we should drill over here, and I need 50 million bucks to go and do it’ – I’ve tried to get meetings with these computers and it’s very hard," he added, to the laughter of those in attendance.

Many of the world’s most valuable gold mining companies feature ETF companies as their biggest shareholders. Among the most influential ETFs are the US$10.7-billion VanEck Vectors Gold Miners fund and the VanEck Vectors Junior Gold Miners fund with US$4.4-billion under management. With the dearth in active management, some mining companies are aiming to attain as high a weighting as possible within ETF indexes so as to attract the most demand.

“The large-cap gold companies recognize this,” Mr. Case said. “As they get bigger, they’re going to get more and more of a disproportionate share of the investors’ dollars, because most of the indexes are market-cap weighted.”

The rationale to get bigger is perhaps even more pressing for Canada’s smaller gold companies, many of which are struggling.

Compared with 10 years ago, there is a much bigger pool of riskier intermediate and junior gold companies, which are largely “uninvestable” said Michael Siperco, an analyst with Macquarie Capital Markets Canada Ltd.

“Generalist funds have seen the number of producers that fit their investment criteria shrink dramatically,” he wrote in a recent note to clients.

He predicts that M&A will soon pick up among Canada’s intermediates and junior miners, especially so-called “single asset” firms, those with only one mine.

While there haven’t been any significant deals announced yet among smaller companies, a number have explored combinations. The Globe recently reported that Iamgold Corp. was in discussions with Kinross Gold Corp. about a possible takeover late last year but talks fell apart. The Globe also reported that Kinross briefly engaged in discussions with Yamana Gold Inc. earlier in 2018 without reaching a deal.