Gold sector becomes target for M&A activity on higher gold price
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Investors are expecting a flurry of mergers and acquisitions among cashed-up Australian gold companies as higher gold prices fuel takeover activity in the buoyant sector.
“Gold companies are experiencing a ‘perfect paradise’ with a high gold price and low energy prices, so they are generating huge amounts of cash,” gold sector expert Simon Popple, managing director and author of the Brookville Capital Intelligence Report, said.
For example, Saracen Mineral Holdings (ASX:SAR) reported a record underlying net profit after tax of $257.5m for the 2020 financial year, up 173 per cent on $94.2m in FY2019, on record production of 520,400oz.
The company realised an average price for its gold of $2,142/oz in FY 2020, up 24 per cent year on year, while its all-in sustaining cost was $1,101/oz, the company said this week.
Australian gold prices are trading around $2,700/oz this week, up 21 per cent on a year ago.
In a presentation this week, Northern Star Resources (ASX:NST) said it had $677m in cash on its balance sheet at June 30.
Sources said mergers and acquisitions in the Australian gold space are starting to build, and pointed to the fierce $395m takeover battle for Cardinal Resources (ASX:CDV).
Chinese gold producer Shandong Gold Mining and Russia’s Nord Gold, which has an 18.7 per cent near-blocking stake in the West African gold explorer, are vying for control of Cardinal.
Resolute has turned its attention to fellow Mali-focused Oklo Resources, which has 11 gold projects in the West African country, after selling a $1.6m stake in Cote D’Ivoire gold explorer Mako Gold (ASX:MKG) worth $23.5m.
Resolute Mining was caught up in some drama this week when the president of Mali, Ibrahim Keita, resigned under military pressure.
Mali is home to the company’s Syama gold mine, and Resolute said this week that operations were continuing as normal with no impact to gold production.
Analysts are looking for possible synergies to unlock further value in the Australian gold sector.
They point to the attraction of a having a single owner for Kalgoorlie’s Super Pit in WA.
Currently operated under a 50:50 joint venture, between Northern Star Resources and Saracen, some analysts see value in having a single operator for the mine.
A single owner would streamline operations and reduce costs, they said.
Saracen paid $1.1bn for Barrick Gold’s half share, and Northern Star paid the same sum to Newmont Gold for its half stake.
Combining the Super Pit’s ownership could lead to a possible merger of its two Australian owners, which is seen as desirable by some gold market players.
Northern Star has a higher market value of $10.7bn to Saracen’s $6.1bn, and one market observer placed the probability of a merger of the two companies at 30-40 per cent.
ASX gold companies with Australian mines are seen as having a higher intrinsic value.
“There is probably a premium for Australian, Canadian and US gold assets, because the market views these as safer jurisdictions (so less chance of nationalisation),” Popple said.
Silver Lake Resources (ASX:SLR) is another gold miner sitting on a substantial cash and bullion pile at $269m at the end of June, up 106 per cent on a year ago, and zero debt.
The company’s Andy Well project 45km north of Meekatharra is in WA’s Murchison goldfield, an area seen as ripe for consolidation by some analysts.
Formerly part of Doray Minerals, Andy Well went into care and maintenance in 2017, and the region also hosts Westgold Resources’ (ASX:WGX) Murchison gold assets.
Another geographical area ripe for mergers between gold explorers is South Australia’s Gawler Craton.
Bellevue Gold (ASX:BGL) with a market cap of $870m has just received a $120m cash injection and is developing a 2.3-million-ounce project in WA that may catch the eye of potential buyers.
The company’s Bellevue project in the Wiluna-Norseman gold belt is surrounded by producing gold mines including, Northern Star’s Bronzewing and Jundee, St Barbara’s (ASX:SBM) Gwalia operation, and Saracen’s Thunderbox.
Alkane had a stock market value of $660m this week.
Not every cash-flushed gold company is circling takeover targets, as some prefer to use their extra revenue to reward shareholders.
“Some gold companies may want to pay good dividends before engaging in M&A activity, utilising their surplus cash to attract new investors, in the hope of improving their share price,” Popple said.
Northern Star will pay its shareholders a special dividend of 10c per share on top of an increased final dividend of 9.5c/share, up 27 per cent year on year.
This is after its underlying net profit after tax jumped to $291m for the 2020 financial year, up 69 per cent on FY2019.
“A key differentiator of the NST business is its balance sheet, this strength has allowed significant organic investment and accretive acquisitions resulting in superior returns to shareholders,” the company said in its results presentation.