McKinsey: Gold industry M&A trends poised to accelerate

By Daniel Brightmore
Gold miners advised to be mindful of mistakes made during the last boom and exercise caution when chasing growth this time around...

The gold industry may have faced challenges when looking to build value for shareholders over the past decade, but its performance has started to improve in recent years. High gold prices in 2020, amid the general uncertainty triggered by the global pandemic, pushed the industry to new heights as attention from investors grew. Helped by low interest rates, gold companies can expect to realise unprecedented cash flows.

A new Mckinsey report, advises that the industry need to be mindful of mistakes made during the previous gold price boom, when growth was chased unidirectionally by several companies.

The resulting underperformance left many companies urgently focusing on operating-expenditure reduction, capital-expenditure rationalization, and balance-sheet clean-up. Acquisition premiums, uncertainty over commodity prices, and shareholder and activist–investor scrutiny will also warrant caution.

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Buoyed by strengthened gold prices, the industry has performed well on most economic key performance indicators (KPIs):

  • Returns to shareholders: The industry generated a TRS (Total Returns to Shareholders) of approximately 33% in 2020 as of December 15, delivering one of the leading returns. For reference, the MSCI world market delivered 12% returns over the same period. 
  • Fundamental performance: Both the top and bottom lines improved in 2020 for the majority of gold companies. Revenue for the next 12 months is expected to be even higher relative to that of the previous 12 months. Similarly, margin is also expected to improve significantly over the next year. This improvement outperforms both mining and other broader sectors. 
  • Balance-sheet health: Gold companies improved on leverage ratios in 2020. With an expected increase in performance, leverage ratios are expected to further decrease significantly, providing a much healthier balance sheet in the near future. Leverage ratios for the gold industry are expected to be significantly better than most other mining industries.

McKinsey recommends a range of imperatives that all gold companies should consider embedding in their strategies to learn lessons from the past and ensure that inorganic growth creates value in the current cycle. 

The gold industry needs to understand why it underperformed in the last decade, examine how and why tides turned in 2020, prepare for high disposable cashflow, manage high industry fragmentation and appreciate the indicators for declining growth options.

To manage expectation, and to make sure the mistakes of the last boom are not repeated, McKinsey advises five key lessons for gold companies to consider incorporating into their M&A strategies:

  • Exercise rigorous validation of premiums (if at all) paid
  • Focus on robust ROIC while chasing aggressive growth
  • Adopt a clear M&A theme with defined synergies and optionalities.
  • Structure beyond pure M&A
  • Communicate (and deliver) to capital markets
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