The mining industry loves a deal. From a major spinning off a significant part of its business into a standalone entity, a mid-sized miner being swallowed up before it gets too big for its boots, or an offloading of an operation over an offer that was just too good to turn down, mergers and acquisitions are the lifeblood of the industry. But in recent years, the appetite for buying and selling has been on the decline, with the 544 deals done in 2014 representing the most barren year in the industry since 2003.
The more cautious climate had been growing over the past three years, with deal numbers declining consecutively. For Clive Johnson, CEO of B2Gold, the 2014 figures may well have been a direct consequence of those years rather than a lack of appetite. "Because so many bad deals were done in the last three years, and so many projects didn't get built on time and were way over capital cost, shareholders are very jaded and skeptical, and I don't blame them," he said.
A return to M&A activity levels last seen a decade ago of course raises concerns that the global industry is no closer to returning to health; however, a growing chorus of voices is suggesting that in certain sectors, 2015 will bring a return to form in M&A activity. Drawing particular focus from analysts, industry and investors is the Australian gold mining sector, which finds itself at a happy intersection of lower costs and more favorable currency conditions.
Done deals and offerings get 2015 off to a good start
"Australian-based producers stand to benefit from the high Australian dollar gold price which will flow through to higher Australian dollar revenues and profits. At the same time, the falling currency has provided relief to Australian dollar-based cost bases with the cost of goods and consumables also lower," said Andrew Knuckey, director of natural resources research at the Commonwealth Bank of Australia. Indeed, while the US dollar gold price has gone down 6.8%, the Australian dollar price has increased 11.3%, sparking renewed interest in Australian gold mines.
Supporting the view that interest down under is set to be reinvigorated, a number of deals already appear to be taking shape. Most notable among them is the announcement that Newcrest Mining is open to offers for its Telfer gold and copper mine in Western Australia.
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With the company, which owns the mine outright, desperate to reduce its debt level and the cost of production at the site having dropped from $1103 per ounce to $867 per ounce, it's an asset that is expected to generate significant interest. "If there is someone out there that values it more than what our mining options are, that's something we are prepared to look at," said Sandeep Biswas, chief executive of Newcrest.
Also keen to use Australian gold's rising stock to decrease its debt level, the world's largest seller of precious metals, Barrick Gold is believed to be open to offers on selling its Cowal gold mine in New South Wales. The mine, which produced 269,000 ounces in 2014 at a cost of $787 per ounce, is part of an asset sale that the company is hoping will raise $1.1bn. Refusing to rule out the sale, co-president Kelvin Dushnisky said: "At the right price you would say anything is probably disposable but we would have to see that it would generate sufficient value for our shareholders to make sense, which is a pretty high crossbar."
Away from the majors, Gold specialist Doray Minerals completed its takeover of Mutiny Gold in March, having announced an initial offer in October 2014, to create an operation with a resource base of more than one million ounces of gold.
Evolution eyes increased investment and M&A activity
With one deal already done, and two major Australian gold mines in the shop window, the prospect of the sector bucking the trend of declining M&A activity appears strong. But the supply of assets is, of course, only half of the equation. In order for it to deliver, there must be strong demand from either industry or investors to enable the deals to go through.
While Evolution Mining was a notable absentee in deals in 2014, it appears keen to evaluate its opportunities in 2015. "We didn't participate out of choice. Some would say we should have, but certainly we feel phase two of this process, which is starting to bring out some larger and longer-life assets, will be interesting," said Jake Klein, executive chairman of Evolution Mining.
Offering his perspective on the prospects for the Australian gold sector in general, Klein was firmly positive, saying: "Australia is making a comeback. It is a really good time to be an Australian gold producer. We're starting to become globally competitive.
Klein draws further optimism from the continuing trend of majors looking to sell off assets in order to reduce debts or exit non-core markets and suggests that may lead to Australia once again attracting the attention of big investors. "That would mean that some fund manager in New York or London, when he's planning his site visits, would start to put Australia back on the map," he said. "In a funny sort of way, this cyclical downturn is a major opportunity for Australia following a boom-inspired explosion of costs over the last decade."
Fortunes from China look likely to turn
Positive signs are also emerging from China, where investment has stalled of late after initially buying into Australian mining operations to a significant degree. Claiming that the failure of much of the previous investment from China was down to both sides, Mark Yumin Qiu, chief executive of Hanking Gold Mining, has stated that he plans to establish a Chinese funded company in Australia that exploits local expertise in exploration and production.
With China expected to invest around $500bn in foreign markets over the next year and shifting focus to more valuable materials as its domestic economy matures, Australian gold is well placed to benefit. "The challenge and opportunity for Australia is to capture our more than fair share of that $500bn investment. Both sides need to work together better and understand where each other are from and we need to invest time in doing so," said Andrew Parker, head of PWC's Asian deals desk.
All things taken together, Australian gold looks set to have an exciting year in 2015. The weakening Australian dollar and lower input costs are enabling it to outstrip its US counterparts in terms of production and value. The continuing drive by the majors to slim down is enabling local producers to pick up assets at favourable prices, and the money markets in the Western financial centres and China appear to be turning attention to Australia once again.
Last year was barren when compared with previous deal numbers in the industry, but 2015, at least in this particular slice of the market, should see a return to the big deal days of old.