Expect gold mining takeovers, but no takeover premiums
The Globe and Mail
June 1, 2020
The gold mining sector is being rocked by a round of mergers and acquisitions that’s widely expected to pick up steam. Courtesy of one influential executive, Barrick Gold Corp.’s Mark Bristow, what’s missing from the current round of deal-making is the premium prices that defined past takeovers.
Precious metals stocks are market darlings because the price of gold is soaring on fears of a pandemic-induced economic downturn and currency-debasing inflation. The last time bullion prices tested these historic highs, a decade ago, a number of mining chief executive officers binged on wealth-destroying deals.
Companies such as Barrick and Kinross Gold Corp. acquired rivals at premium prices – 20 per cent to 30 per cent above where the target company’s stock was trading – then spent years dealing with a hangover of paying down debt and writing down the value of assets.
Enter Mr. Bristow. Two years ago, he was CEO of Randgold Resources Ltd. when Barrick made an all-stock, US$6-billion offer for his company that featured no premium to where Randgold shares were trading, and proposed that Mr. Bristow would join Barrick as its CEO. The board and shareholders had to take a leap of faith, betting their prospects were better under Barrick’s ownership, with Mr. Bristow’s continued leadership.
The deal got done and the shareholders’ faith was justified: Barrick’s stock price has more than doubled in the past two years, a period in which gold bullion prices have increased by just 30 per cent.
Mr. Bristow, 61, garners media attention for his larger-than-life exploits, including taking part in charity motorcycle rallies that criss-cross Africa. In mining circles, he’s better known as a skilled operator and evangelical leader.
While running Randgold from Africa, Mr. Bristow made the trip to Toronto every three months to catch up with investors, analysts and industry executives. One common element to Mr. Bristow’s quarterly visits were well-attended breakfast meetings that became known for mixing candour, insight and hugely entertaining stories. (One banker who routinely attended now refers to Mr. Bristow as “Dos Equis,” because like the character who pitched the Mexican beer, “he’s the most interesting man in the world.”) At these sessions, Mr. Bristow sold an approach to deal-making.
In recent months, growth-focused companies such as Endeavour Mining Corp., SSR Mining Inc. and China-based Shandong Gold Mining Co. Ltd. staged takeovers on terms that are similar to the Randgold deal, making offers priced at or near where the target company’s stock was trading. The one miner to pitch a deal at a significant premium – Kirkland Lake Gold Ltd.’s $4.4-billion acquisition of Detour Gold Corp. – saw its stock price drop sharply when the transaction was announced last November.
“This bull cycle in gold mining M&A is different from what we’ve experienced in the past,” said Jim Meloche, a principal at investment bank Origin Merchant Partners. Mr. Meloche has been advising mining companies for 25 years and said “because many historical takeovers played out in the past with significant premiums for target companies and then followed by large write downs for buyers, transactions with no to low premiums might become the new norm for this cycle. Executives and boards appear to be more cautious and prudent on acquisition premiums.”
Takeover activity continued even as the COVID-19 pandemic shut down mines in many jurisdictions over the past three months. Mining companies are now adapting to health care issues. In a recent report, Scotia Capital analyst Tanya Jakusconek said: “Despite the new challenges brought about by COVID-19, the companies are managing very well and are seeing minimal cost or productivity impact.”
As production picks up, Ms. Jakusconek said she believes that « M&A in the smaller capitalization companies will continue as single-mine companies and smaller producers merge to create scale and capital market profile, and to diversify operating and financial risks.”
Mr. Meloche agreed the most likely takeover targets are gold miners that rely on just one large property.
“To command a premium multiple, ideally you should diversify the business,” he said. « You really need to operate a portfolio of high-quality properties.”
However, Mr. Meloche said the success of the Barrick’s merger with Randgold – a deal that brought together two large mining companies – increased long-standing pressures for mid-tier mining companies to consider more “merger of equals” transactions, which can have compelling “synergy opportunities” to reduce costs and increase reserves. If these deal do play out, credit Barrick and Mr. Bristow for kicking off a new round of consolidation.