23 January 2019
Game of Thrones: M&A Activity Heats Up■
Why we are seeing consolidation in gold:
Taking a step back, it’s worth asking why
the M&A momentum The answer is three part and represents three broad sector
themes: First, gold companies have not been attractive/relevant to generalists for some
time and becoming a large player with diversified production, a long/predictable
reserve life, and an attractive dividend will help make these companies more investible
from a generalist perspective (Barrick kicked off this trend when it acquired Randgold).
Second, new reserves are becoming increasingly scarce and valuations are more
attractive now (gold equities sold off heavily in 2018), which presents a timely
opportunity for larger companies to add reserves relatively inexpensively. Third, the
gold sector is being compared to other commodity industries that are far more
concentrated and operate with larger economies of scale, so there is an element of
catch up within a fragmented gold sector.
Let’s Make a Deal – Criteria
Figure 1: Selected Criteria for Gold M&A
ScaleValuationReservesGeography
Market CapitalizationShare Price PerformanceReservesConcentration by Jurisdiction
2019E ProductionP/NAV PerformanceMine Life
2021E Production
Valuation Ratios
(P/NAV, P/CF,
EV/EBITDA)
Mine Life with Resource
Conversion
2019-2021E
Production GrowthNet Debt
Reserves
Source: Credit Suisse
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How to think about potential buyers and sellers:
We looked at specific metrics to
identify which companies are more likely to acquire (potential buyers) and which
companies would be attractive targets (potential sellers). We highlight these criteria
below:
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Scale (market cap / production)
– While the mergers between Barrick/Randgold
and Newmont/Goldcorp may suggest an overall race to being the largest mining
company in the world, scale at different levels is needed to attract investor interest
(in particular generalist investors). We highlight market cap and production as a
proxy for scale and signal for a potential merger. There are not many companies
left that would be able to compete at the ABX/RRS and NEM/GG level (Newcrest
being the next largest company by market cap at US$12.6B, and a theoretical
merger with high-premium AEM at US$9.2B market capitalization wouldn’t even
have a combined production of 4Mozs). We believe that consolidation in the mid-
range level is likely to occur given the lack of companies that produce at the 2-3/3-
4Mozpa level.
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Valuation
– We believe companies trading at premium valuations are more likely to
engage in all-stock deals to acquire companies trading at a discount
(Newmont/Goldcorp is an example of this) as this is typically immediately accretive.
Therefore, we screen gold companies based on P/NAV, P/CF, P/E, EV/EBITDA, as
well as 12-month P/NAV performance. We look at 12-month share performance
because we believe companies that sold off heavily in 2018 are more likely to be
acquired because of attractive valuation, even if a premium is applied. For the
valuation metrics listed above, we are looking at discount to peers and discount to
historical valuation.
23 January 2019
Game of Thrones: M&A Activity Heats Up■
Reserve/resource accretion
– We identify companies with below average reserve
mine life (both based on reserves alone and reserves + 50% resource conversion)
as these companies could be buyers and we also look at potential combinations
that would result in significant additions to reserves/resources (and would
presumably be easier than doing exploration standalone). The resource accretion
also represents a proxy for exploration/development pipeline, which for companies
that have limited exploration/development projects is an important factor and could
make them buyers. Companies that would be attractive acquisition targets in this
category are those with lower EV/reserves and significant net debt/EBTIDA ratios
which may limit the development of those projects as a result of capex spend
limitations.
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Geography
– We highlight operational footprint for gold companies to identify those
companies that have mines concentrated in one or two jurisdictions and therefore
may look to diversify or acquire other producers/assets in the same regions for
operational synergies. On the other hand, companies may look to strengthen their
presence in a particular region in order to further improve their particular profile to
attract a specific investor base (i.e., AEM in North America – safe, predictable
jurisdictions, or Endeavor Mining – extensive experience in operating in higher-risk
jurisdictions such as Africa).
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Balance sheet / debt
– Companies with strong balance sheets and lower debt are
more likely to acquire and also be acquired, as the risk of the transaction is lower.
Companies with heavy debt burdens would not be attractive targets in our view
within an industry that has actively de-levered since 2014 although companies with
good development pipelines but high net debt may be opportunistic. Companies
with lower cash balances and manageable debt levels could be willing sellers
because they do not have the required capital to develop projects and replace
depleted reserves. Note that we have included the analysis of debt with
“Reserve/resource accretion” and “Valuation” as the consideration of balance
sheet/debt is in conjunction with those two categories.
23 January 2019
Game of Thrones: M&A Activity Heats UpKey Takeaways – Companies to Watch
Figure 2: Potential Acquirers and Targets
Company TickerPotential Acquirer RationalePotential Target Rationale
Agnico EagleAEM.N
- High valuation (P/NAV)
- Experienced operator with proven track record
- May want to increase North American presence to strengthen
foothold in safer jurisdictions
- Strong balance sheet
N/A
NewcrestNCM.AX
- Intentions to acquire given failed negotiations with GG
- Looking for North American listing
- High valuation (P/NAV)
- Highly concentrated in APAC, may want to diversify
- May want to increase production profile (scale)
N/A
Evolution MiningEVN,AX- High valuation (P/NAV)- Experience with M&AN/A
Kirkland Lake GoldKL.TO
- High valuation (P/NAV)
- Experience with M&A as the Company was formed through a
three-way merger
- May want to extend below average LOM.
N/A
Endeavour MiningEDV.TO
- Experience in dealing in higher risk jurisdictions, potentially
looking for expansion opportunities in Africa
- Currently produces ~650kozs, may want to achieve scale
N/A - not likely a target by larger senior gold companies that may
not want to increase their risk profile in Endeavour's operating
jurisdictions.
AngloGoldAU.N
- High valuation (P/NAV)
- May want to diversify institutional investor base (company
currently based out of South Africa)
- May want to achieve scale (production/market cap)
- May be a target given its healthy production profile and would
allow a larger company to achieve additional scale
KinrossKGC.N
- May want to achieve scale to narrow market cap and production
gap between Kinross and peers (ABX, NEM etc.)
- Add to below-average mine life
- Lower costs through increased scale
- Replace depleted assets
- Poor share price performance in 2018
- Issues with development projects and relations with
governments (reflected in current valuation)
IAMGoldIAG.N
N/A- Low valuation (P/NAV)
- Poor 2018 share price performance could make the company
vulnerable to a takeover
- Good reserve base may make IAG attractive to a company in
need of reserves
YamanaAUY.N
- May want to achieve scale to narrow market cap and production
gap between Yamana and peers (ABX, NEM etc.)
- Poor P/NAV performance in 2018 related to its above average
leverage to the gold price
- Higher debt levels than peers.
- May consider selling to achieve scale
- Need capital to fund growth
B2GoldBTG.A
CenterraCG.TO
EldoradoEGO.N
N/A- Low valuation (P/NAV), high debt makes EGO more vulnerable
- High reserve base with above average mine life may make the
Company attractive.
- High debt levels may be a deterrent, could lead to asset sales
by EGO instead
PretiumPVG.N
N/A- Low valuation (P/NAV)
- Difficulties in variability of mining grades, could make it a target
for a company with experience in geological and mine plan
optimization
- May consider merging with another company to achieve scale
- Strong growth profile, ideal for an acquirer with expertise in West Africa where BTG's growth prospects are located
- May consider merging with another company to diversify risk out of Kyrgyzstan
- Below average P/NAV, making it a potentially attractive target
Source: Credit Suisse。