Surging share prices has given strong M&A currency to the scrip issued by St Barbara, Saracen, Regis Resources, Northern Star and Evolution. Will CEOs cash in on the booming conditions or opt for organic growth?
This question has been on the minds of CEOs at global gold miners over the past six months, and the answer has been bigger is better.
In September, Barrick Gold Corp and Randgold said they would merge to create the world’s biggest gold company. Within two months of the merger being completed, Barrick revealed $1.2 billion in writedowns.
Worse still, Barrick said its “all-in sustaining costs” (AISC) of production per ounce would rise to between $US870 and $US920 an ounce in 2019, compared to $US806 an ounce in 2018. To put that in perspective, one of the lowest-cost gold producers in the world is Newcrest Mining, which has an AISC/oz of $US747.
In January, Newmont Mining Corp announced a $US10 billion merger with GoldCorp at a 17 per cent premium to the GoldCorp share price. Within weeks, GoldCorp announced a $US4.7 billion pre-tax writedown of assets.
The merger mania peaked this week when Barrick said it would make a hostile $US17.8 billion bid for Newmont to create the world’s biggest gold miner. This threw a spanner in the previously announced deal between Newmont and GoldCorp.
Newcrest Mining was inevitably dragged into the corporate wheeler-dealing on the other side other globe because of its status as the largest gold miner in Australia. The speculation centres on it being a possible buyer of Australian assets discarded by the merged Barrick/Newmont.
The Barrick blockbuster deal was timed perfectly to coincide with this week’s gathering in Miama of the world’s leading mining executives and institutional investors focused on resources. They are attending the BMO Capital Markets Global Metals & Mining Conference.
Newcrest chief executive Sandeep Biswas used his speaking slot at the conference in Miami to talk up his success at turning around Newcrest’s performance over the past few years.
Under his leadership, Newcrest has improved its safety performance, made a profit from the Lihir gold mine in Papua New Guinea for the first time in 20 years and generated $3.5 billion in free cashflow.
Biswas has brought a level of engineering excellence to Newcrest which was not apparent under his predecessor. He has invested in new technology and can now boast that Newcrest is the only gold company in the world to perform large-scale underground block caving.
The combination of this unique technical capability with Newcrest’s long-reserve-life advantage gives Biswas the flexibility to stand aloof from the merger mania. Its Cadia and Lihir reserves are the two largest operating ore reserves in its peer group.
Biswas told the BMO conference that Newcrest’s large gold endowment “enables us to be patient with our capital and gives us the time to make decisions on terms which align with our constant focus on cash generation and shareholder value”.
He told the conference Newcrest’s latest innovation in block caving, called undercutting, has the potential to reduce cave establishment costs by up to 30 per cent. The new technique is being tested at the Telfer and Cadia mines.
Newcrest could easily stand aloof from the merger mania in the gold sector and still deliver far greater value creation for shareholders than those trying to build the biggest gold mining company in the world.