The total transaction value of mergers and acquisitions in the second quarter of the year reached $2.86 billion in twelve deals, with Chinese buyers acquiring gold assets and smaller companies joining forces to become mid-tier producers, the Bank of America Securities says in a new report.<\/p>\n
The investment bank noted that the 12 transactions represented the highest quarterly total since the fourth quarter of 2012, and the dollar value was nearly double that seen in M&A deals during the first quarter of 2020.<\/p>\n \u201cFor the H2 2020, the need to replace reserves mined in 2020 plus the higher gold price will be catalysts to drive further M&A,\u201d<\/p>\n Bank of America<\/cite><\/p><\/blockquote>\n<\/figure>\n It also pointed out that one of the trends in the second quarter was the preference for assets already in production or nearly in production. \u201cSix of the twelve transactions in Q2\u201920 were for assets currently in production,\u201d the report states.<\/p>\n Describing the current investment climate as a \u201cbuyer\u2019s market for companies,\u201d Bank of America (BofA) noted that five of the transactions with reserves that took place in the second quarter of the year \u201cwere priced at a 23% discount to the prevailing gold price, below the historical range of -20% to +10%.\u201d<\/p>\n \u201cThe data indicates that H1\u201920 was one of the best periods to be a buyer of gold companies, mines and projects,\u201d the bank concluded. <\/p>\n \u201cFor gold company transactions, acquisition prices, relative to the prevailing gold price, were on average at the lowest level since 2011 and the second lowest since 1998.\u201d<\/p>\n The bank also pointed out that \u201cmega projects are back in vogue,\u201d citing Artemis Gold\u2019s C$190 million cash acquisition of New Gold\u2019s Blackwater project in British Columbia, one of the largest open-pit gold deposits in Canada, which has \u201cadded over $200 million of new market value\u201d to the buyer. <\/p>\n \u201cThis may put the spotlight back on companies sitting on multi-million oz. low grade gold megaprojects.\u201d<\/p>\n In addition, of the 12 deals in the second quarter, seven had reserves and five had resources-only. <\/p>\n \u201cThe \u2018elephant in the room\u2019 was SSR Mining\u2019s friendly $1.71 billion all-share merger with Alacer Gold on May 11 2020,\u201d it states, which has created a +600,000 oz. gold producer. <\/p>\n \u201cThe remaining eleven transactions ranged in size from $27 million to $238 million. The global senior producers were absent from the M&A circus in Q2\u201920.\u201d<\/p>\n Mid-tier producers that don\u2019t do deals risk being \u2018left behind\u2019 by their rapidly growing peers.<\/p>\n Bank of America<\/cite><\/p><\/blockquote>\n<\/figure>\n Moreover, only half of the Q2 transactions were in mining-friendly jurisdictions (Canada, Australia and Ghana), illustrating that \u201cpolitical stability [was] less important in Q2\u201920.\u201d<\/p>\n The M&A deal flow is unlikely to slow in the second half of the year, the bank forecasts, with higher gold prices and the need to replenish reserves.<\/p>\n \u201cFor the H2 2020, the need to replace reserves mined in 2020 plus the higher gold price will be catalysts to drive further M&A,\u201d BofA commented in its July 9 report. \u201cAfter years of underinvestment, we see production profiles under pressure and reserves in decline. The evidence is too obvious to ignore\u2026At year-end 2019 total gold reserves for the global gold producers amounted to 612 million oz., down 30% from the peak of 875 million oz. at year-end 2012, equating to declining reserve life indexes.\u201d<\/p>\n It predicts that with gold cresting $1,750 per oz., the result will be \u201cwindfall free cash flows and expanding valuation multiples\u201d that will look a lot like the period of record M&A between 2010 and 2013. Mid-tier producers that don\u2019t do deals, it reasons, \u201crisk being \u2018left behind\u2019 by their rapidly growing peers.\u201d<\/p>\n \u201cAn unintended consequence of non-core asset sales by senior gold producers (post the mega mergers in late 2018-early 2019) has led to a burgeoning \u2018senior\u2019 mid-tier producer sector marked by gold output in the 1.0-1.75 million oz. range,\u201d the report states. \u201cThese larger more liquid producers are coming to the attention of global gold investors (likely at the expense of the smaller mid-tier gold producers [0.5-1.0 million oz.].\u201d<\/p>\n The bank lists eight companies that are intermediate\/mid-tier producers that it believes have \u201cintriguing\u201d mines and or development projects: Pretium Resources, Victoria Gold, Torex Gold, Wesdome Gold Mines, New Gold, Lundin Gold, Teranga Gold and Perseus Mining.<\/p>\n On the exploration and development front, BofA says its list of companies with interesting assets contains: Gold Road Resources, Osisko Mining, Rubicon Minerals (now Battle North Gold), Great Bear Resources, Gold Standard, Orla Mining, Sabina Gold & Silver, Marathon Gold, Okio Resources, International Tower Hill, Novagold, INV Metals, Premier Gold, MAG Silver, Midas Gold, Algold Resources, Eastmain Resources, West African Resources, Belo Sun Mining, Artemis Gold, and Sirios Resources.<\/p>\n One thing that might slow M&A down, of course, is the inability of companies during the current pandemic to conduct site visits of potential acquisitions. As a result, \u201cacquirers excelling at \u2018desktop\u2019 analysis of assets could find an \u2018edge\u2019 over their competitors.\u201d<\/p>\n\n
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