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Australian gold midtiers best placed to rise via assets shed from major mergers

The assets likely to be divested from both Newmont Mining Corp.'s proposed US$10 billion takeover of Goldcorp Inc. and the US$18.3 billion Barrick Gold Corp.-Randgold Resources Ltd. tie-up could propel some highly successful, cashed-up midtiers into majors, with some in the sector seeing the most opportunity for Australian miners to grow.

"We think both of the mergers are good because they're both going to open their warehouses and sell a lot of projects," a veteran of the mining sector who preferred not to be named, told S&P Global Market Intelligence. "We're going to see new companies built. There are flagships in there that will help some junior become a very valuable and profitable large company."

The proposed combined Newmont-Goldcorp entity is expected to shed between US$1 billion to US$1.5 billion worth of assets over the next two years, while the Barrick-Randgold tie-up could off-load even more with figures ranging from US$2.6 billion worth to BMO's estimation of US$5 billion.

Industry CEOs and analysts see Australian companies as particularly strong suitors for the assets.

"There'll potentially be a flood of assets taken up by the Australians," Exploration Insights partner Joe Mazumdar said. "They've got the most cash flow. They've got the best value."

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Bob Vassie, CEO of A$2.4 billion gold producer St Barbara Ltd., said he was "very excited" at the mergers between four of the world's major gold producers, but noted that while many of Australia's midtiers had already talked among themselves in the past year about what is available for both company and asset-level mergers and acquisitions, not much has happened.

He told S&P Global Market Intelligence there had been speculation that the two proposed tie-ups might trigger more mergers between larger companies, but cautioned that some assets on offer from the aforementioned ones may not suit given varying jurisdictions to what Australian midtiers are used to, like Africa, while others still may be "quite big with big closure costs and legacy issues" that need to be considered.

This is in line with BMO's report, Precious Metals & Minerals: A new way to assess M&A, which said "purchasing assets in the same or similar jurisdiction as existing operations leverages the acquirer's knowledge of the regulatory and cultural environment."

BMO said the capital raising difficulties of explorers have led to a drop in discoveries, and "we now stand at the brink of a global decline in larger producer output." To stem this, BMO suggests that larger producers need to deploy some of their now-improved balance sheets to acquire development assets or promising smaller producers that have run into capital constraints.

"M&A has slowly been re-entering investor consciousness, and we suspect that this trend will gain momentum in 2019, especially since there have now been a few successful transactions," BMO's report, issued in December 2018, said.

It also said discounted tangible assets could mitigate downside risk, and noted that smaller acquisitions tend to be more accretive than bigger deals.

One thing the majors will likely demand is that would-be buyers come bearing cash. Mazumdar said the newly merged majors will spurn stock, leaving less profitable juniors and midtiers out of the running and favoring cashed-up companies and private equity.

North American attraction

Vassie, who has over the past year flagged expansion into North America — as has Gold Road Resources Ltd. and AngloGold Ashanti Ltd. — said the continent is "looking quite interesting."

He said that as Australian producers' valuations have risen above their North American counterparts by multiples due to good performance, cash flow and consistency, "the ratios are now aligned to being able to look at the North American continent, and to an extent South America."

Vassie also cautioned that North American companies "can be a bit hesitant because they don’t want Aussies coming over with what they perceived to be paper that's valued at a higher multiple than their own," but while that "makes life tough, it doesn't stop us trying."

"We haven't given up on Australia, but we would consider asset purchases as well as [company] M&A in the Americas."

Citi Metals & Mining Research Vice President Trent Allen told S&P Global Market Intelligence that the general message from the two big deals announced in recent months is that "gold miners now have to worry about running their companies like any other business — margins and making money rather than just producing ounces for their own sake."

Companies like A$6 billion producer Northern Star Resources Ltd. and A$6.5 billion company Evolution Mining Ltd. were built from catching assets as they fell out of Barrick and Newmont, but for a different reason as the sellers were repairing their balance sheets and it was good timing for the buyers, he noted.

Some of the Canadian assets that could come to market may be higher on the cost curve, said Gregory Rodwell, a senior research analyst with S&P Global Market Intelligence. Still, they "will definitely have some buyers," he said, with juniors and midtiers looking to expand.

Sprott U.S. Holdings Inc. President and CEO Rick Rule also saw another underappreciated asset going on sale: people. Rule recalled that when Barrick merged with Placer Dome in 2006, industry veterans suddenly became hires for juniors and other companies. That in turn spurred profits, growth and discovery in the sector.

"One thing that happened is that the Vancouver juniors feasted on extraordinarily competent technical people," he said.