Merger mania is returning to the beaten-down materials sector.
Already in 2014, we’ve seen $102.8-billion worth of announced mergers in the sector, according to S&P Capital IQ. That’s a 210% increase, compared to the same period in 2013!
The gold sector is also catching the merger fever.
Combined, the two companies last year produced about 12 million ounces of gold – 12% of annual global gold output. That’s about three times greater than the No. 3 producer, AngloGold Ashanti (AU).
At the moment, the merger is on hold because the companies haven’t agreed on exactly how to spin off or sell their non-U.S. gold assets.
But there’s one overriding factor that’ll inevitably draw the two together…
And that’s the possible combination of their substantial gold mining operations in Nevada, the center of U.S. gold production.
Industry observers believe that focusing on this core operating region of Nevada, while spinning off international assets, could result in $1 billion in synergies.
Observers believe that, before cost savings, the newly merged company would produce 8.7 million ounces of gold at an all-in cost of only $960 per ounce.
So the deal makes perfect sense for Newmont and Barrick.
In effect, the merged company would be focused on very high-quality assets in a safe jurisdiction, while unloading lower-grade assets in jurisdictions that are iffy.
But the implications are far wider than for the two companies themselves. It has implications for the industry as a whole.
Gold Mining Industry Problems
Talks between Barrick and Newmont came after a period when the gold price retrenched in the industry, showing the need for major players to cut costs.
Gold lost 28% in 2013, the steepest annual drop in price since 1981.
Barrick and Newmont were no exceptions to reporting losses, tanking by $2.8 billion and $1.17 billion, respectively.
The current industry-wide cost cuts include reductions to exposure to more marginal deposits and risk in non-mining-friendly jurisdictions.
This comes after years of pursuing output growth, no matter the cost.
This reckless behavior pushed the industry’s average all-in cost to above $1,400 an ounce. Obviously, that’s above the current price of gold and not a long-term recipe for success.
Merger, a Good Sign
But now, this proposed merger bodes well for the industry, after three years of pain.
- These types of mega mergers historically occur either at the peak of a cycle or at the trough. After the beatdown in gold (and its stocks) over the past year, surely no one thinks we’re at the peak of the cycle. The merger is likely the first sign of a trough, and the start of a rebound from a bear market.
- These types of mergers are also a signal that the companies are becoming more confident that the worst in behind them.
If the two biggest players in the industry think that we’ve seen the worst for the gold industry, it’s indeed a good sign.
It may make a gold mining ETF such as Market Vectors Gold Miners (GDX) worth a look.
And “the chase” continues,