Mining investors still suffering the impact brought by the worst year for acquisitions in more than a decade can take consolation from the prospect of a once-in-a-generation opportunity for deals among gold companies in 2016, a study shows.
The odds of more gold deals are being supported by unusual market conditions, as prices for the precious metal have rallied on increased demand for a haven from market turmoil. At the same time, diversified miners continue to sell assets in order to pay down debt.
The jump in gold prices this year is already spurring transactions. Only last week, Tahoe Resources (TSX, NYSE:THO) agreed to acquire Toronto-based miner Lake Shore Gold (TSX:LSG) in a Cdn$945 million ($680 million) all-share deal. And South African producer Harmony Gold said earlier this month it was seeking acquisitions.
However, while the global gold mining landscape will see increasing consolidation and divestment, the market share will remain diversified, with the top 10 producers accounting for about 25% of global output, according to a fresh report by BMI Research.
“Despite support for prices in 2016 stemming from negative real interest rates in developed economies and equity market volatility, we expect prices to remain capped,” say the analysts.
They forecast an average of $1,150 an ounce this year and in 2017, compared to $1,415 per ounce over the previous five years.
While the precious metal retreated earlier this week, prices are still up 13% this year and have climbed about 7% this month alone.
By contrast, the MSCI World equities index is down 10% year-to-date, while US crude oil has plunged 20%.
In terms of regional outlook, BMI Research expects China’s gold sector to continue facing higher production costs, depleting reserves and rising domestic demand. All these factors combined should push local gold miners to invest abroad in the coming years, the analysts say.
For Australia, the study predicts that more gold miners will have to scale back operations or divest from high-cost assets this year, as weak gold prices weigh on profit margins.
Russia’s gold sector will continue to be dominated by Polyus Gold, as the firm’s Natalka mine remains the key driver of gold production growth over our forecast period to 2020, BMI Research expects.
In Canada, gold firms are expected to continue to see consolidation, divestment and increased acquisition activity abroad as well as domestically. But the experts say the market will remain dominated by the usual suspects — Barrick Gold, Goldcorp and Yamana Gold—, which will keep focusing on maintaining competitive cash costs and shedding non-core assets.