While investor confidence in the mining industry has never been worse than it is right now, mining firms recently completed in-person Colorado mining conferences and rekindled efforts to seek alliances and partnerships to bring potential projects online and share risk amongst parties.
On Tuesday, the conference reported that global miners Agnico Eagle Mines Ltd. and Kirkland Lake Gold Inc. have agreed to a merger of equals, with the merged firm continuing to be known as AEM.
Executives at Agnico Eagle and Kirkland Lake, according to Bloomberg, have been discussing a merger of the Toronto-based miners for more than two years now. Existing shareholders of Agnico Eagle Mines will own 54% of the merged business once the transaction closes, with Kirkland Lake Gold shareholders holding the remaining 46%.
The proposed merger would benefit Agnico since it will add low-cost mines, boost output, and make it easier to create free cash flow to finance expansion projects in high-quality jurisdictions. As a result of the acquisition, Kirkland Lake’s properties in Canada and Australia will be added to the company’s already existing mines in Canada, Mexico, and Finland.
While both businesses’ boards of directors unanimously agreed to the merger, analysts anticipate a new Agnico Eagle to take its place in gold production as the leading senior gold producer. The combined company will produce approximately 3.4 million ounces of gold in 2021, making it the world’s third-largest gold miner with a market capitalization of roughly $24 billion. It has the lowest unit costs, highest margins, and the most favorable risk profile, as well as industry-leading best practices in critical environmental, social, and governance areas (ESG). Mineral reserves at the new Agnico Eagle Mines will be about 48 million ounces of gold, with cash on hand of $2.3bn.
However, after Barrick’s mega-merger with Randgold Resources Ltd. in September 2018 and Newmont Corp.’s (NEM) subsequent acquisition of Goldcorp Inc. a few months later, M&A activity slowed in the mining sector because COVID-19 restrictions have made necessary site visits challenging to plan and execute. Deals took a backseat as businesses prioritized responding to the pandemic’s urgent worries.
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Travel restrictions have been removed, and juniors de-risking high-margin projects have become much cheaper lately. Hence, due to this merger, I anticipate more M & M&A activity in the mining sector and for things to stay that way until 2022.
When the last gold rush was in full swing, gold mining firms spent a record-breaking US$38 billion in 2011 to add to their holdings. An ounce of gold purchased at the top of the mining cycle cost around three times as much as an ounce purchased a decade earlier.
Recent M&A activity has been driven by the requirement for value-added reserves at periods of low junior stock prices since the industry acquisition wave during the last gold bubble left a legacy of over $80 billion in write-downs when gold prices collapsed. The industry has gotten back to basics and is more concerned with the soundness of its financial sheet than it is with accumulating more ounces.
Additionally, gold miners worldwide have been working hard to regain the confidence they lost at the last cycle’s apex when many transactions destroyed value instead of producing it. Significant money was lost during the previous mining cycle’s zenith owing to overpriced M&A deals that didn’t deliver on their promises. Investors lost faith in the industry in 2016. Still, global gold miners worked hard to regain it by providing strong shareholder returns and strengthening their capital and operational discipline at the same time.
However, mining firms are also required to have compelling growth stories and repaying surplus cash to shareholders. Investors have concluded that the sector’s upside potential and opportunities for capital gain are restricted because many miners have issued guidance for future output that is essentially flat.
With junior-controlled ounces presently on the market, mining corporations have many possibilities to change their portfolios via acquisitions or partnerships in a depressed market. According to S&P Worldwide Market Intelligence, junior miners will be responsible for a 43 percent rise in global gold exploration expenditures in 2021, spending a total of $6.2 billion – the most significant annual amount since 2013.
Despite the increasing price of gold, many investors have lost faith in the mining industry due to a string of bad deals. Consequently, small and medium-sized juniors have frequently battled to reduce the danger of a major, which is capital-intensive, taking over their initiatives.
As resources are depleted and exploration becomes more expensive, fresh underground gold deposits, formerly owned by large mining companies, are becoming more challenging to discover. Many options are available to significant mining corporations to address their resource limitations. Either via a search for new subterranean resources or by acquiring junior development firms, they must find new underground resources.
As a result of the preceding bear market’s years of underinvestment, the global miner production profiles are now under pressure, making further mergers and acquisitions likely in the coming years. International mining firms now have a chance to utilize strategic M&A to position themselves as the apparent winners over the next decade, given the present scenario in the industry.
The high-profile Barrick/Randgold merger announcement in September of 2018 provided the trigger for striking a significant bottom in a severely oversold mining complex, in contrast to a flurry of overpriced transactions that took place during the prominent mining cycle peak in 2010-2011. It is possible that the Agnico/Kirkland transaction news helped create another significant bottom in the mining sector, given that the industry is presently trading at oversold levels.
Due to the present downturn in the mining industry, resource stock speculators can use this opportunity to do thorough due diligence on a well-chosen watch list of excellent juniors. Click here to get immediate access to my research, newsletter, portfolio, watch list, and trade alerts if you need help selecting a group of M&A prospects.