During 2021, gold miners, yet again, took over the reins in the mining industry’s M&A space, as confirmed deals totalling $14.8 billion dwarfed the $2.6 billion realised by the copper miners and the nearly $300 million achieved by the iron ore mining industry.
This represents the fifth consecutive year it has surpassed the $10 billion mark, while the merger between Agnico Eagle and Kirkland Lake Gold, which is expected to clear during the first quarter of this year, suggests that the pace in 2022 is unlikely to cool.
Since 2015, the gold price has increased by around 55%, boosting corporate cash reserves, which has led to a massive debt reduction and higher dividend payouts. On the other hand, exploration budgets from the biggest miners have dropped massively since 2014. Back then, average growth capital expenditures represented around 37% of the total Capex, while during the last couple of years, specially accelerated by a preventive budget cut derived from the uncertainties that the pandemic brought, this value has dropped to 16%.
Since 2015, the gold price has increased by around 55%, boosting corporate cash reserves, which has led to a massive debt reduction and higher dividend payouts.
Meanwhile, miners are burning through their reserves at an increased rate, as production levels have resumed pre-pandemic levels, leaving few options other than buying replacement and growth reserves via M&A. The top 10 miners’ gold production share on global production dropped from 38% back in 2011, to just over a 26% in 2021.
This is not necessarily bad news. Big companies seemed to have chosen to focus mainly on Tier 1 assets, keeping a tap on costs while allowing them to forecast their production with greater certainty. Being a common practice in the past, currently few of these companies boast of developing a mine from early stage of exploration, as the focus seems to have shifted into acquiring these reserves and resources through M&A, before mine depletion bites in their gold output levels.
The Agnico Eagle-Kirkland Lake Gold’s merger will create one of the largest gold miners in the market with a combined value over $24 billion
The Agnico Eagle-Kirkland Lake Gold’s merger will create one of the largest gold miners in the market, with a combined value over $24 billion, according to its press release. Refinitiv Metals Research estimates the cost of acquisition at around $48/oz, considering the over 20 million ounces in reserves Kirkland Lake reported in 2020. The Canadian company also spent over $122 million in exploration and corporate development that same year, and its reserves increased by 1.12 million ounces (including depleted reserves), resulting in Kirkland Lake spending $109/oz discovered.
Mine supply is forecast to reach an all-time high of just over 3,500 tonnes during 2022, representing an increase by nearly 2% compared to the previous year. With very few projects in the pipeline, the conundrum lies in for how long mine supply can grow, or even maintain current output levels, before starting to decline. Companies are starting to release their guidelines for the near future, so we may soon know if exploration will get back to a strategic part of the corporate vision, or if we will continue to rely on junior miners to unlock the precious reserves the industry needs.
Gold M&A deals surpassed the $10 bn mark five years on a row
Source: Refinitiv Eikon, Refinitiv Metals Research
Gold M&A deals over time
Refinitiv Eikon, Refinitiv Metals Research