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EDITORIAL

Avoiding repeat offences

I s the global gold sector about to repeat mistakes of the past?
It is a question increasingly relevant as we head into 2020 after a year dominated
by headline M&A deals. The past 18 months have seen all the industry majors make
company-redefining corporate plays and the tier of Australian companies below them
launch their own growth strategies.
It has been exciting stuff in a market which had witnessed five years of downsizing
and restructuring. However, could the recent burst of corporate activity be sowing the
seeds for the sector’s next downfall?
Barrick Gold Corp and Newmont Goldcorp’s headline takeovers were designed to
counter the shrinking of specialist gold funds and place them back into the arena
of generalist investors. It is accepted that if generalist funds do return to gold equity
investment, it will only be a single stock, and that usually means the biggest company in the sector. So, Barrick and
Newmont are picking up the old “big is beautiful” mantra to set themselves apart from rivals and make themselves the stock
of choice among the generalist investors.
Remember, it was this strategy – buying ounces and increasing production no matter the cost – which landed the gold
majors in trouble when the gold price dropped in 2013.
On that occasion, generalist investors quickly abandoned the sector, leading to the mine closures and asset sales of the last
six years. The Australian mid-tier companies took advantage of that restructuring, first in Australia and now in North America.
Newcrest Mining Ltd, Northern Star Resources Ltd, Evolution Mining Ltd and St Barbara Ltd have all picked up assets in
North America in the last 18 months, using their relatively high-performing scrip to acquire assets in the region.
They have been rightly lauded for their ambitions, but the jury is still out on exactly how successful the purchases have
been. The problem is, these North American assets have their complications and are generally marginal (hence why
they were deemed surplus to requirements). Northern Star, Evolution and St Barbara did a fantastic job of turning around
operating performance at mines in their own backyard but there will inevitably be cultural differences in North America which
mean the turnaround may not be so swift.
Northern Star is already finding the transfer to North American miner tougher than anticipated at Pogo in Alaska. This is
not to say the acquisition can be deemed a failure, but the company hasn’t turned Pogo’s performance around in quite the
same way it did Barrick’s Eastern Goldfields assets.
Evolution has acquired a mine which posted AISC of $US1,600/oz in 2019 and even St Barbara is taking heat for its
acquisition of the low-cost Atlantic gold operations due to the inflated price it paid; $C722 million.
Most intriguing of the recent M&A has been Saracen Mineral Holdings Ltd’s purchase of Barrick’s 50% share of the Super
Pit. The deal has been widely lauded but there are still plenty of unanswered questions. For now, Saracen is the non-
managing partner in the 50/50 JV with Newmont, but it must surely have ambitions to take the entire asset on. That would
be a huge jump for what, by global standards, is still a junior company.
Gold Fields Ltd has been one of the few large gold companies to shy away from headline acquisitions in 2018, its last major
purchase being its 50% interest in the Gruyere development project in Western Australia. I recently asked chief executive
Nick Holland about the opportunities being generated by the mega-mergers, but he was adamant there was little of interest
for his company.
“It is apparent the best assets won’t be put on the block,” Holland said. “Those assets for sale will be the most undercapitalised
with looming closure cost obligations.”
In the meantime, the exploration sector continues to wither on the vine. As the closing forum discussion at NewGenGold
suggested, the exploration funding model is all but broken. If the mid-tiers are spending money on headline acquisitions,
and then even more money on getting those acquisitions in order, it means less money for exploration and less money for
JVs with juniors.
If this happens, the gold sector is in danger of committing the same mistakes it did last time around, leaving itself with a
group of bloated companies and an understocked development pipeline.
Dominic Piper

dominic@paydirt.com.au @Paydirt_Media @paydirtmedia @PaydirtMediaAustralia

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