Picture: Getty Images
Diggers and Dealers: More gold mega-deals loom as Gold Fields seeks shareholder support for Yamana tie-up
Mining
share
South Africa’s Gold Fields, producer of well over 2Moz of gold including around 1Moz in Western Australia, is in a minor pickle.
It announced a premium US$6.7 million merger for Canada’s Yamana Gold back in May, which has been coolly received by shareholders concerned they are giving up too much of their company to chase growth.
The New York and Joburg listed gold major’s global head Chris Griffiths disagrees.
He thinks gold miners at the top of the industry will need to keep consolidating to secure value in a sector stung by both a lack of discovery in recent years and super high prices for individual assets.
Growth peaking without acquisitions
Griffiths says internal growth at Gold Fields, which includes the Gruyere, St Ives, Agnew and Granny Smith mines in WA, would be capped at around 2.8Moz without M&A.
Despite giving up 39% of the value in the merger to Yamana, Griffiths says it would be much more expensive and riskier to try purchase individual assets it would need to explore and bring into production.
“We looked at 10 years worth of acquisitions of gold assets, single assets company-wide. And we also looked at more in depth over the last few years, the last three years or so,” he said.
“When you look at our deal, it plots on the bottom third of total acquisition costs. When you look at these individual assets that folk talk about, generally, they plot in the top third, so with very little margin.
“And then of course, you’ve got to develop them.
“(Only) one out of five of those assets is producing gold today, or is in at least construction of the project.”
A lack of exploration success on a global scale is making assets more expensive, Griffiths said.
“What’s happened over the last 10 years, though, is the exploration is yielding less results,” he said.
“So the competition for these assets, and for junior companies or individual assets, is getting much more intense.
“And what you’re going to see is the cost of these assets going forward is going to be very expensive.”
Majors Barrick, Agnico Eagle and Newmont have all done the same as Gold Fields in recent years, swallowing large mid-tiers to secure their growth pipelines.
Its something that means multiple deals are still in play, Griffiths says.
“I think we’ve already seen some quite big consolidations in the gold sector over the last few years, I personally think that there’s many more to come,” he said.
“It might not be all of the top one, two or three. But I think you’re going to see more consolidation for exactly the reason I mentioned – we are seeing less discoveries or the discoveries are in worse jurisdictions.
“And the ability to get assets is going to have to come from consolidation. So I think without a doubt, you will see more consolidation in the industry, just at more expensive prices.”
Mining services rates will lift
Develop Global (ASX:DVP) boss Bill Beament meanwhile has doubled down on comments about the issues facing underground miners, saying prices will need to lift for mining contractors to support the development of major new projects in the coming years.
It is one of the reasons why he thinks his ASX-listed miner and services provider will be able to secure deals that would see miners give up equity to secure his mining team.
“If you’re a developer and you’re building a project, I gave two examples on the site visit of a company that changed mining contractors, and how much their market cap got smashed,” he said.
“You can go to boards and say ‘hey, you did this and you lost 500 mill market cap in one quarter because of that change out.’
“So it’s a pretty easy argument and discussion piece at a board level to actually weigh out maths and we had examples saying how you’re going to build this and if they don’t perform, what’s that going to do to your market cap?”
Beament says major mines emerging will include the Bellevue Gold mine his team is already on with their first contract, Liontown Resources’ (ASX:LTR) Kathleen Valley, BHP’s Oak Dam, Northern Star’s Super Pit underground, not to mention Newcrest’s Havieron and Rio’s Winu.
It’s a list that will make your eye water.
While cost inflation in the sector has stalled a number of projects, Beament thinks inflation in consumables and materials has peaked, but says mining contractor rates will have to rise to get upcoming mines built.
“They’re all world class projects and quite big projects so they’ll support a contractor’s margin. But I just think the mining services margins have to go up,” he said.
“If you want good people, you’re going to have to pay for it.
“We’re gonna have to try and drag some of these people back from offshore as well. That’s the other part and you’ll only drag them back with money.”
