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Evolution Mining chair cautions on M&A as gold tipped to surge higher

Evolution Mining Ltd. Executive Chairman Jake Klein sounded caution on M&A activity amid what fellow ASX-listed midtier gold miner Northern Star Resources Ltd. CEO Stuart Tonkin believes will be an improving price environment.

Klein told the Diggers & Dealers conference Aug. 7 that history shows it is better to invest counter-cyclically, as opposed to doing so when the price is going up, and risking impairments when it falls.

SNL Image
Northern Star Resources CEO Stuart Tonkin addresses the
Diggers & Dealers conference Aug. 7, 2019.
Source: Diggers & Dealers

Tonkin told delegates later Aug. 7 that a broader snapshot of the gold price over the last 50 years shows that peaking gold production is always followed by multiyear gold bull runs, thus the current situation leads him to expect that prices may rise further before any correction.

Irrespective of current gold price spikes amid the U.S.-China trade war driving investors into safe havens, Tonkin said observing current circumstances, including majors' gold production and reserve declines and their investment in exploration, "it is evident that if we're not at the peak, we're close to it."

"Going forward, it should not be a surprise to us that the gold price will lift," Tonkin said.

While there has been interest in the assets to be divested by the new entities following the deals involving Newmont Goldcorp Corp. and that between Barrick Gold Corp. and Randgold Resources, Klein said they still needed to be value-accretive to shareholders for Evolution to bid for them.

Klein also downplayed any such "merger of equals" among similarly sized companies that St Barbara Ltd. CEO Bob Vassie flagged at the 2018 Diggers event. The Evolution boss said shareholders have been content with Evolution remaining a midtier rather than merging to become a major.

SNL Image
Evolution Mining Executive Chairman Jake Klein addresses the
Diggers & Dealers conference Aug. 7, 2019.
Source: Diggers & Dealers

Klein said Evolution is under a lot of pressure to get involved in M&A but cautioned that when gold rose to US$1,900 per ounce in 2011, there was a "frenzy of M&A," which resulted in about US$85 billion worth of impairments.

Klein cited Evolution's 2015 purchase of the Cowal asset from Barrick for US$550 million as a counter-cyclical purchase that filled his two key criteria: the seller was motivated and Evolution ended up finding more gold there than it bought.

Klein cited as another example Evolution's Mt Rawdon gold mine, which started off with an eight-year mine life and now has a defined mine life of 26 years.

He said Evolution has always believed that having about six to eight assets is "the right number" and is not convinced that gold is a "scalable business." Instead, he would rather keep improving the asset base quality through optimization and regional exploration.