There are no doubt a few gold mining MDs sitting around thinking ‘what more do I need to do before investors react’?
The gold price keeps getting better and better, reaching record highs again in the past week, a ray of golden sunshine in an otherwise sombre commodities sector. This should be the time that share prices should be surging, fueled by optimistic analyst reports that ‘this is just the beginning’.
Alas, shareholders are taking a much more cautious approach to gold equities, particularly so for the smaller end of the market capitalisation curve.
At the big end of town, for the 20 or so gold companies in the +$1 billion market cap club, only seven are trading at 90% or more to their 52 week highs.
When we wrote on gold back in December 2023, the gold price was US$2,041/oz with analysts from the Bank of America tipping a 17% rise in 2024 to US$2,400/oz. Less than five months later, that target looks like it could get breached shortly.
The price gains so far have resulted in an increase in the Aussie dollar gold price of around A$500/oz over the past five months (this author remembers working as a gold geologist in the late 1990’s when the gold price was around A$550/oz for years).
So, with a surging gold price and producers seemingly printing cash, why are shareholders shy in embracing gold companies?
We’ll look into that shortly, however its worth noting that whilst most producers are trying to get their share prices to 12 month highs, for explorers, it’s a hard job just getting anyone interested at all.
For the companies in the $100-200m market cap bracket, the average share price is just 60% of their 12 month highs. For the sub-$100m club, most are trading at levels closer to the 12 month low.
Back to why shareholders are giving most gold companies the cold shoulder, following are a few thoughts:
- General market jitters – Whilst the gold price is strong, many investors have a portfolio of investments and if it is resources heavy, its being weighed down by underperformance across a number of commodities.
- Inflation – Whilst gold is often seen as a hedge against inflation, there may be a view that the inflationary policies globally are working, with inflation no longer seen as a medium-long term issue.
- Speed of the run – It may also be the case that investors want to see a few quarters of solid performance before they are convinced that this is ‘the new normal’ and jump in harder.
Predictably, analysts and corporate finance houses are looking at merger and acquisition opportunities for those with strong share prices or flush treasuries. The lure of combining two mid-sized companies to make one large strong mining house is always attractive, at least on paper.
Last month, the analyst team at Shaw and Partners released their report on ‘Golden M&A Opportunities’. Continuing the theme that gold equities were lagging the gold price and there would be an upwards correction due soon, they highlighted a few picks that looked attractive.
As well as the ‘1+1=3’ type opportunities that come from scaling up, the Shaws team looked at regional consolidation, complementary bolt-on assets as well as large, single assets that just look too attractive not to have in the portfolio.
We’ve already seen a bit of the jostling for position in the gold sector, with Karora Resources fending off Ramelius before agreeing to merge with Westgold and Perseus emerging as the victor over Silvercorp in the battle for Orecorp.
Newmont, not long after acquiring (or, depending on your view, re-acquiring) Newcrest Mining, has put ‘For Sale’ signs out for a number of its assets globally. While the best days of these assets may be in the past, there is no reason why they may not present excellent value opportunities for mid-tier companies.
There are some excellent historical M&A examples (BHP buying WMC, Northern Star buying KCGM, Newmont with Boddington), however there are unfortunately those that were bought at the top of the market or didn’t pan out as planned (Rio with Alcan, IGO with Western Areas, Rio with Riversdale Mining).
Time will only tell whether any of these M&A transactions turn out to be good buys.
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