Lower gold prices said to spur fresh mergers
'It's just a matter of who will be next'
David Steinhart -- Financial Post
Many of Canada's smaller gold companies will be acquired or merged as the gold industry -- battered by years of slumping prices -- is forced to consolidate, analysts said yesterday.
"There's no question about it ... the starting gun has already gone off," said John Ing, president of brokerage Maison Placements Canada. "It's just a matter of who will be next."
Mr. Ing made his comments in the wake of AngloGold Ltd.'s offer to buy Australia's Normandy Mining for US$2.3-billion in stock and assumed debt.
Mr. Ing said Canadian gold miners such as TVX Gold Inc., Goldcorp. Inc., Kinross Gold Corp. and Placer Dome Inc. are all searching for the right deals at the right prices.
"Kinross has [multiple] mines and I think there is a desire for them to be acquired or to do some acquiring," he said. "Goldcorp has some fine mines and it has said it is looking. As for Placer, not all of its acquisitions have been smart, but if its stock gets cheap enough, you never know."
Gold, which has traded in a 52-week range of US$252.80 to US$326.25 an ounce, has lost a lot of its lustre within the industry. At about US$260 an ounce, the gold price has rarely been lower in real terms and is far from the US$850 an ounce spike in early 1980.
As well, the return on capital for the world's six largest gold miners was only about 4% last year, based on a higher gold price without hedging, versus a 10% cost of capital.
Nick Majende of Canaccord Capital Corp. in Vancouver said that as long as gold prices stay down, companies will need to consolidate.
"The smaller companies have to be candidates for it," he said. "But gold prices will have to go up substantially for these companies to resist the temptation."
As Mr. Ing points out that those who watch the industry believe big and small players can survive. However, they say it is difficult for mid-sized gold companies to be profitable in the long term.
Consolidation or talk of it is also occurring rapidly in many other parts of the world. Already, Australia's Delta Gold Ltd. and Goldfields Ltd. have said they are in merger talks. Goldfields has been considered in play since its proposed deal with Toronto-based Franco-Nevada Mining Corp. fell through last year. Last September, authorities in South Africa blocked the US$5.1-billion merger because the new company was to have been headquartered in Toronto.
Franco earlier this year agreed to acquire 19.9% of Normandy in exchange for cash and mines. With yesterday's AngloGold-Normandy deal, Franco will realize a profit of about US$100-million.
And should the proposed deal go through, AngloGold's production costs will decline by 4% to US$182 an ounce. Normandy, which mines gold from open pits, employs 4,700 people, compared with the 67,500 at AngloGold. The bid would allow AngloGold to keep its spot as the world's largest gold producer, a position that was challenged when Barrick in June agreed to buy Homestake Mining for US$2.4-billion.
"I have always thought that the Barrick-Homestake deal was a watershed moment for the sector," Mr. Ing said. "From that time on, we have seen companies trying to position themselves [for acquisition], and that will continue to be an ongoing process."
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