Contents

Introduction: Staying Competitive in the Gold Sector

Most of the global mining industry has spent the last two years in a slow march of cautious investment decisions and strategic positioning. But the gold sector has jolted into transformation mode in the past few months with the kind of M&A activity unseen since the price peaks of a decade ago.

In the last six months, the world's top two producers, Canada's Barrick Gold and US-based Newmont Mining, launched friendly merger deals with Randgold Resources and Goldcorp, respectively, creating entities whose respective 2018 combined output was 5.8Moz and 7.4Moz.

To make things interesting, Barrick then proposed Newmont ditch the Goldcorp deal and merge instead with Barrick, citing US$7bn in synergies. After a war of words, Newmont proposed the two consolidate a long-discussed JV of their Nevada, US operations, which alone accounted for more than half of the synergies, and the two soon announced an agreement.

The deals lay clear the industry's need to team up to compete. The merging of large players will allow the combined companies to report significantly higher production than they would individually, to cut loose any lingering underperforming assets and to focus the resources of two firms pointedly on the best projects - likely meaning a smaller number of projects and less total capital expenditure than if the companies did not merge.

Tier one development assets among the largest gold operators are scarce as their mines age and most of them drastically reduced exploration spending over the last several years of lower prices, leading to a dearth of discoveries. This is also leading majors to M&A with those juniors that were able to fund exploration through the last several years and hold promising projects.

Having not done their own grassroots exploration, most gold majors must now acquire projects externally to beef up their pipelines. Many operators also face declining grades at existing mines, pushing costs upward and pressuring the companies to find competitive assets. "To counter the decline in production, operators continue to post higher capital investments across most regions with particular focus in South America and Africa," GFMS analysts wrote in their Gold Survey H1 2018 report.

A separate GFMS report released early 2019 noted that South America had the lowest overall processed gold grade of all world regions in 3Q18 at 1.38g/t, a drop of 4% year-on-year versus a global drop of 0.6% (to 1.66g/t). "We estimate [global] production costs will continue to increase in 2019 as new mine openings won't be able to completely offset lower grades in current operations," the report said.

Pinos Altos mine, Mexico. Credit: Agnico Eagle

Meanwhile, gold miners now are in a position to invest after several years of austerity, operational optimization and debt reduction. Though gold prices are only marginally higher than they were a year ago and really have improved little since their initial crash in 2012-13, miners now have room to do fun stuff with their profits, like pay dividends and reinvest in the business. That's where the big mergers are different this time around: all-share deals with minimal premiums, avoiding debt and focused on the mutual benefit of synergies rather than bulking up on production ounces.

Some experts believe more gold M&A could be on the horizon. Analyst Andrew Kaip at BMO Capital Markets wrote in a recent research note (pre Barrick's Newmont bid) that Barrick, Agnico Eagle, Fresnillo and Newcrest Mining can be considered potential acquirers and AngloGold, Gold Fields, Kinross and Yamana Gold are potential targets, while strategic combinations could make sense for AngloGold-Gold Fields and Agnico-Newcrest. Big deals indeed. This could also create ample opportunity for mid-tier players as large deals result in divestitures.

This report features a compilation of content produced by the BNamericas mining editorial team specifically to understand where the gold sector is going and what to expect in Latin America, including a closer look at the drivers of M&A activity, the impacts on exploration and a walk through the top projects to watch in the year ahead.

Figures: Key Financials of Top Gold Producers

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