Gold sector poised for a takeover rush

It’s not a feeding frenzy yet, but a close look at the gold sector shows that conditions are perfect for a takeover rush.

Newmont’s $26 billion bid for Newcrest is the best example of what’s happening at the top end of gold. Barrick, Newmont’s arch-rival for the title of world’s biggest goldminer, is poised to join the game of M&A (mergers and acquisitions).

Chesser Resources (ASX: CHZ), a $71 million minnow alongside the gold giants, is an example of how the action has filtered down the pecking order as it falls to a “double your money” bid from Canada’s Fortuna Silver.

Silver Lake’s last minute $750 million “party-crashing” bid for St Barbara threatens a friendly merger of St Barbara with Genesis Minerals, the company trying to dominate the Leonora gold belt in WA.

More of the same, with variations, can be expected over the next 12 months as gold company managers try to achieve growth through M&A having struggled, in many cases, to have succeeded through discovery and development.

Growth, by whatever means, will also increase exposure to gold at a time when its price is rising strongly having just hit a record US$2060 an ounce with big-name banks such as Citi tipping a price of US$2300/oz by the end of the year.

Struggle for growth through discovery and development

For investors, it could be a quite exciting time as shown in the Chesser/Fortuna situation with Fortuna’s share-swap bid valued at 14.2c per Chesser share, a 94.5% premium on Chesser’s pre-bid price of 7.3c.

Chesser management recommended acceptance partly because of the price (albeit in Fortuna shares) and probably because of the risks and costs associated with developing Chesser’s best asset, the promising Diamba Sud gold project in the West African country of Senegal.

Another factor behind the proposed marriage of Fortuna, a business valued on the Canadian market at C$1.45 billion, is that Chesser has been tearing through its cash reserves (outlaying $8.2 million in the last two quarters) leaving it with $3.1 million on March 31.

Mixing a good mining prospect with cash is a classic part of the M&A process now underway in a toughening finance climate where access to capital is getting harder and securing debt for an African mine development even tougher.

Newmont and Barrick’s ‘mines bigger than yours’ contest

Newmont, heavyweight champion of the gold world with a stock market value of US$38.3 billion could hit US$55 billion when it adds Newcrest, making it a clear leader over Barrick which is currently valued at US$34 billion.

Management at Newmont and Barrick would both deny that they are interested in a “mines bigger than yours” market capitalisation contest but the acquisition of Newcrest has stirred Barrick boss Mark Bristow who confirmed last week that he was in the hunt for M&A opportunities.

With evidence pointing to an across-the-board gold sector feeding frenzy of big acquiring small, and like-minded management teams launching strategic mergers to survive being picked off, the critical questions are why now and what next?

A combination of factors are at work in gold, ranging from it being an asset which generally performs well at times of high inflation and economic uncertainty, which is certainly the case today with added impetus coming from US bank failures, the war in Ukraine, Chinese threats to invade Taiwan, and lacklustre investment returns by other asset classes.

Central banks are buying gold

But the big driver for gold is the seemingly insatiable appetite for the metal (which doubles as a currency) from the world’s central banks which have been loading up on gold for the past 12 months, with no sign of a slowdown in their buying.

Last year, government controlled central banks bought a record 1087 tonnes of gold and they’re still buying at a furious rate. China alone has snapped up 120 tonnes over the last five months.

The reason central bank buying is particularly important as a guide to future trends as the banks are easily the biggest owners of gold and when the biggest owner of anything buy more it’s an extremely positive sign because the banks have an intimate understanding of gold and currencies.

With gold, the only currency that matters is the US dollar and it is under pressure against most other currencies, especially the Chinese yuan and even the downtrodden British pound which this week hit US$1.26, the highest in 12-months.

At the top of the global financial food chain, which is where central banks reside, there are signs of a sea-change rolling in as some central banks switch out of US dollar assets as they fall and buy gold as it rises.

The 25% rise in the gold price over the last six months is largely the result of central bank buying by countries which want to knock the US dollar off its perch as the word’s reserve currency with subscribers to that school of thought including China, Brazil, South Africa and Russia, a political pariah but one winning from gold.

What’s happened in Russia is that while it wages war in Ukraine the western world has been waging an economic war against Russia, including a putting a block on an estimated US$300 billion in reserves – but not against its gold.

Russia’s gold is kept in Russia and there’s nothing the US or EU can do to attack that asset, a lesson other countries are learning as the US “weaponises” its dollar in its proxy war with Russia.

Gold market may start its next surge

Analysed anyway you like, and the answer is the same, gold is high and rising.

“All the ingredients for a bull market in gold and silver are on place”, Citi said in a research note last week which drew comparisons with events after the 2008 global financial crisis, a time when gold last outperformed everything else.

Back then the gold price rose from US$750/oz in late 2007 to US$1000/oz by March 2008, and then up to US$1770/oz by August 2001, a rocket run of close to US$1000/oz (136%) in little more than three years.

With economic and financial conditions today seemingly as chaotic as 2008, it might not be unreasonable to ask whether the gold market is in the foothills of the next big upward surge.