Sector M&A activity is heating up for both global and local small-cap gold miners, Phillip Hudak, portfolio manager at Maple-Brown Abbott, has said.
The commodity has witnessed a considerable rally over the last eight months – hitting a fresh record high of US$2,531 in August – serving as a key driver of increased activity.
On the other side of the coin, Hudak explained that exploration activity is still limited, leading to a depletion of gold reserves and boosting margins for producers, who still have further to run.
“Coupled with a lengthening and less certain permitting process for new mines, this is causing producers to pursue a ‘buy over build’ strategy to growth,” he said in a recent market outlook.
As such, it is now becoming cheaper to “buy gold miners rather than build gold mines”, Hudak underscored.
“We believe this M&A activity will continue, particularly at the smaller end of the market.”
“We’ve seen Newmont and Newcrest get together, Goldfields has been active and that has flowed through to Australian small-cap gold companies, including Ramelius taking a stake in Spartan, Perseus taking a stake in Predictive Discoveries, and Red 5 and Silverlake Resources merging.”
In conversation with InvestorDaily last month, Hudak reiterated that declining exploration spend and depleting reserves also mean there is a limited organic growth profile for many gold miners.
For instance, local gold companies Red 5 and Silver Lake Resources in February announced they would merge via a Silver Lake scheme of arrangement and solidified the move in June.
Explaining the intention behind the merger, Red 5 and Silver Lake said the deal was driven by their collective pursuit to create “a leading mid-tier gold company with diversified operations”, and importantly, for growth opportunities.
Hudak noted: “Given the recent strong gold price and rising producer margins, this has promoted merger activity to backfill declining production profiles.”
As such, global transactions are filtering their way to the smaller end of the Australian gold mining sector.
Select companies maintain investor appeal
The AU price rally continues to boost margins for gold miners, Hudak further noted, adding that following the recent earnings season, opportunities in select gold companies are abounding.
“The gold price has done very well over the past two years, despite rising real bond yields which are normally not good for gold. However, the impact of bond yields has been offset by high levels of central bank buying and we see value emerging for gold producers.”
Such companies that are producing gold and are also taking advantage of the sector’s “scarcity value”, have thus outperformed the gold price.
“This contrasts to gold developers, which have underperformed the gold price, as they are seeing higher funding costs, project cost blowouts and delays,” Hudak said.
“We believe there is still significant upside in select gold companies, especially those companies that are increasing their resource base and have low-cost options to bring gold production.”
