Like any epic tale, the big deal between Barrick Gold Corp. and Randgold Resources Ltd. can be read in at least a couple of ways.
The cynical view is to see it as a desperation strategy. If you can’t do much to upgrade the appeal of your key commodity (and gold miners can’t) and if your recent share price performance has been brutal (and it has), then there’s nothing like a flurry of corporate re-engineering to keep investors intrigued.
But a more positive take is to view the grand alliance as the beginning of a new round of merger and acquisition activity in the sector. That’s the view of IKN, the widely read mining industry newsletter that was first to break news of the tie-up.
“A big-boy M&A deal like this should shake up the long-dormant sector,” IKN declared. It told readers to expect it “to be the start of things, not an isolated incident” and, on Tuesday, named two Canadian gold miners as likely future targets: B2Gold Corp. (“cheap as chips right now”) and Alamos Gold Inc. (“the big options volume … suggest an interloper”).
Investors with a stomach for risk and a willingness to be patient may want to pay attention. Gold miners possess at least one outstanding virtue at the moment: They’re universally loathed and therefore inexpensive.
The most telling indicator of how far they’ve fallen in public appeal came in July when Vanguard Group, the giant U.S. asset manager, announced it would rename and reorient its Precious Metals and Mining Fund. The investment vehicle is to be relabeled as the Vanguard Global Capital Cycles Fund, a banner that deftly avoids any mention of gold or precious metals.
Money managers are backing away from the sector for good reason. Gold typically thrives when the U.S. dollar is weak and inflation is spiking. With the greenback thriving and inflation generally believed to be under control, gold prices have been falling. The case for buying bullion appears exceptionally weak.
But could conventional wisdom be wrong? “We remain of the view that gold prices reside stubbornly below fundamentally justifiable levels,” said commodity strategist Christopher Louney of RBC Capital Markets.
In a note this week, he acknowledged it will take a catalyst to reignite interest in precious metals. The catalyst would have to involve real economic or financial distress, not just a perception of heightened global risk, Mr. Louney said. However, in his view, it’s a matter of “when”, not “if”, such a catalyst occurs.
Even a flicker of interest in precious metals would act as a tonic for today’s battered gold shares. Many have lost a quarter or more of their value over the past year.
The bargain-basement prices that now prevail offer a lot of scope for would-be deal makers – even in cases such as the Barrick-Randgold alliance, where the benefits of the tie-up appear uncertain.
Investors could previously have put money into each company individually, choosing Barrick if they wanted to dial down their risk level or Randgold if they were willing to bear the uncertainties of mining in Africa. After the merger, they will have to buy them as a single package. It’s not clear if this will be better from a shareholder’s point of view.
From a corporate perspective, however, size has its own appeal. The larger a gold miner becomes, the more it qualifies as a must-buy for investors who want exposure to the sector. The combined Barrick-Randgold will be the world’s biggest gold miner and hold an unrivaled portfolio of the world’s top mines.
One big question is whether Newmont Mining Corp., the next-biggest gold miner, will feel tempted to bulk up, too. It had discussed a merger with Barrick back in 2014 but those talks went nowhere. On Tuesday, Newmont chief executive Gary Goldberg told Bloomberg he didn’t view a merger with Barrick as a value proposition, but indicated he might be interested in buying Barrick’s half of their shared Kalgoorlie mine in Australia, or discussing opportunities at Barrick’s Nevada properties.
All that hints at a new round of asset shuffling in the sector. Gold may still be down, but the deal making could just be starting.