Canada’s Barrick Gold's (TSX:ABX)(NYSE:GOLD) hostile $17.8 billion bid for rival Newmont Mining (NYSE:NEM) could free up a group of assets the combined company would no longer consider key, such as their Kalgoorlie super pit 50/50 joint-venture in Western Australia.
After launching the offer on Monday, Barrick chief executive officer Mark Bristow said he had already been contacted by parties that have expressed interest in the company’s Australian assets.
The divestment goals announced by the Newmont-Goldcorp tie-up and the recent Barrick-Randgold merger provide “a significant opportunity” for ASX-listed names to acquire assets, according to UBS analysts.
“Australian gold producers have stronger balance sheets than their North American peers. We think Evolution and Northern Star are best placed to make accretive acquisitions given their strong track records in this area,” said UBS in a note last month.
Market rumours indicate that one of the potential buyers could be Melbourne-based Newcrest Mining (ASX:NCM), especially after Bristow said there was “a very good chance” of some Australian operators becoming involved.
The pace of M&A activity in the gold mining sector remains brisk. There is a good reason for that. Many miners have all-in sustaining costs in the order of $800-$900 and the price of gold is north of $1300. Considering the share prices of many gold miners are still reasonably close to multi-year lows it makes a lot more sense to buy and established company with production capacity already paid for than to engage in the expensive and risky business of exploration and development of greenfield sites.
The pace of mergers is a reflection of the dearth of new high grade, long life opportunities globally and a significant increase in the price of gold will be required to reignite a new speculative investment cycle. That suggests that it is at this part of the cycle that miners offer the best value.
The weakness of the Australian Dollar has been a boon for Australian gold miners since which had helped the domestic price of gold move to a new all-time high.
The S&P/ASX All Ordinaries Gold Index completed a more than two-year range in December and a sustained move below the trend mean would be required to question medium-term scope for continued upside.
At The Chart Seminar in Melbourne last April, the clear takeaway was the outperformance of gold shares. That suggests the Australian sector is a temporal leader relative to the global sector.