More Mergers on the Horizon for the Gold Mining Sector

The gold mining industry is in dire need of assistance. The sector, which is recovering from one of the worst price dips in the last 30 years, is not exactly in the best of health.

According to Joe Wickwire of Fidelity Investments, almost 33 percent of all gold production is a money-losing venture if the precious metal price is lower than $1,250 oz.

Right now, the trading price for gold is around $1,230 oz.

“It’s part of the life cycle of industries that every so often you need to have a cleansing of that which is not working,” Wickwire said.

A cleansing of the market might not be such a bad thing.

Since last year, the gold market has declined by 28 percent, prompting many gold producers to cut budgets, sell assets and adjust mine plans, which has totaled more than $26 billion in writedowns.

What the industry needs is more mergers to assist in improving the investor returns and in eliminating the mines deemed unprofitable.

Profitability (or lack there of)

According to Randgold Resources Limited CEO Mark Bristow, the biggest issue facing the gold mining industry today is profitability.

“It’s going to be tough, right now we’ve seen the fund managers looking to management to fix it,” he said. “I think, to a large degree, the fund managers are joined in how we got there, culpable like management.

“Perhaps some of the fund managers should practice what they preach, and that is allocation of capital,” he continued. “For gold mining to be profitable, you have to take out a whole lot of gold production. If you take out a lot of gold production, everyone’s going to make more money including the host countries in which we operate.

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“I think that’s what the industry needs and I still think the industry’s living in denial,” he added.

The current price of gold makes it hard for any mining company to be successful.

“I don’t believe as an industry we’re profitable at $1,300, let alone $1,250,” he said. “If you look at the assumptions being made to allocate capital today, they are above the spot price, which doesn’t make a whole lot of sense.

“Although we’re [the industry] saying the right things, I don’t believe we’re actually doing them, with exceptions of course.”

Mergers and acquisitions

During the first half of 2014, deals for the mining and metals industry had a total value of $16.7 billion. That’s 69 percent less than the previous year, and 34 percent less in deal volumes. Nearly nine out of every ten agreements were valued at less than $50 million.

Simply put, there needs to be more mergers in the gold sector.

According to estimates by Bloomberg, funds raised $1.1 billion for investments in mining and metals this year, which is nothing compared to the $8.8 billion in 2013. Less than $2 billion has been spent by PE investors on mining assets in the past two years.

The latest Ernst & Young market barometer believes contributors to these funds are unlikely to wait much longer to see their investments put to use.

“There should be a flurry of activity within the next 6-12 months, as these countercyclical investors who have been waiting for clear signs that we are at the bottom of the market begin to make their move when assets prices are at their lowest”

Consolidation is another consideration the industry teetering on.

By combining companies in mergers and/or acquisitions, unprofitable operations can be eliminated and weak companies with good assets can be targeted by stronger producers.

It’s a win-win for the gold industry.