Gold sector set for wave of mid-tier mergers, says Wall St bank

Continued consolidation of the gold sector could be a theme for the rest of 2020...
24th January 2020
Tim Treadgold

Continued consolidation of the gold sector could be a theme for the rest of 2020, according to the investment arm of Bank of America, which believes there is a wave of mid-tier mergers on the way thanks largely what’s happened at the top end of gold.

The bank’s argument revolves around last year’s big North American deals which saw Newmont merge with Goldcorp and Barrick acquire Randgold a double-barrelled process which has also seen a large number of non-core assets sold, including the Kalgoorlie Superpit.

It’s those discarded assets which have pumped up the mid-tier sector but also created too many stocks in the $US500 million to $US4.5 billion range with what BofA Securities calls “undifferentiated cases” for investment.

Fund managers and well-heeled private investors have been telling BofA that they’re keen on gold but they need more big companies to attract their interest.

“An unintended consequence of the non-core asset sales was to create larger more liquid mid-tier gold producers coming to the attention of global gold investors,” BofA said in a note headlined “A buyers’ market in global gold M&A”.

“With more non-core asset sales on the table, this trend will likely continue in 2020. Mid-tier producers not involved in M&A risk being left behind by their rapidly growing peers.

“After years of under-investment, we see that there will be further M&A. We see too many mid-sized gold vehicles with undifferentiated investment cases.”

BofA does not name potential targets for mid-tier M&A but did name Australian stocks which have beefed up courtesy of the non-core disposals, including Newcrest (Red Chris in Canada), Evolution (Red Lake also Canada), and Northern Star (half of the Superpit).

What BofA has done is suggest that buyers of Newmont’s and Barrick’s non-core assets have effectively created an upper level of the mid-tier gold sector a move up which could force other companies to follow. This might become a theme for the rest of 2020, especially if the gold price stays high, as seems likely.

A second theme developing in the precious metals sector is the palladium rush which has propelled South African producers sharply higher, along with miners of its sister metals, platinum and rhodium.

Over the past 12-months palladium, which is used in car exhaust systems to remove noxious gases (as is platinum), has doubled from $US1250 an ounce to $US2500/oz. Platinum, which was initially left behind, has started to play catch up, and very-rare rhodium has rocketed up to $US7000/oz.

Australia is not a significant producer of platinum group metals (PGMs), but there is a dormant exploration play that pops up from time-to-time, the Panton Sill, which is owned by troubled nickel miner, Panoramic.

The Panton project came close to development a few years ago when it was treated as a platinum play with palladium a by-product. But that was a time of very low prices for both, especially palladium.

The game has changed for the metals, but apparently not for Panoramic or Panton, a situation which might be corrected if PGM prices stay high.

Battery metal stocks continued to endure a tough time with lithium miner Galaxy Resources quietly revealing that its Mt Cattlin mine had been mothballed for four months, news which rubbed another 5c off the stock’s price, which ended yesterday at $1.12, half where it was at this time last year.

Syrah Resources led a weaker graphite sector, slipping 6c to 58c after a poorly-received report for the December quarter. Investment bank views of Syrah remains as far apart as ever. Credit Suisse remains leader of the cheer squad but has cut its price target to $1.30. Macquarie is among the doubters with a target of 36c and a sell recommendation.

Lithium and graphite stocks dominated short-selling activity during the week with Galaxy now 17.8% shorted (investors betting on a price fall), followed by Syrah (16.75% shorted) and Orocobre (13.77%).

Potash, and other fertilisers, returned to the headlines, but it remains a tricky space for small players given the bulk nature of the materials produced and the activity of mega-miners which like bulks and can afford the transport costs.

London-listed major, Anglo American, is the latest to stir the potash pot with a deal to buy troubled British mine developer Sirius Minerals in a $1 billion rescue bid which will see Anglo possibly lock horns with BHP and the big Canadian producers, almost certainly ensuring low potash prices for some time.

African-exposed stocks made a few waves during the week with Resolute opting to sell its major Australian asset, the Ravenswood mine in Queensland and raise fresh capital as part of a balance sheet clean-up and single focus on its African assets – which did nothing for the stock as it shed 3c to $1.17.

Orion Minerals, another African-focused project developer, gained a small amount of ground after announcing the start of a process to find a partner for its Prieska copper and zinc mine.

Other news events and market moves of interest included:

  • Silver Lake Resources continued its remarkable revival during a strong December quarter which prompted upgraded gold sales guidance to between 230,000-and-240,000oz and a 6% fall in costs to around $A1350/oz, news which saw Silver Lake added 17c to $1.53.

 

  • Magnetic Resources reported promising shallow gold results from its Lady Julie prospect near Laverton in WA with best drill hits of 2 metres at 5.44 grams a tonne from a depth of 29m and 6m at 1.79g/t from 1m. The stock rose 6c to 60c.

 

  • Adriatic Metals’ promising Rupice zinc and copper project in Bosnia is generating interest in London with a research house, Tamesis Partners, describing Rupice as one of the highest-grade assets in the world, helping the stock add 6c to $1.88.

 

  • Sultan Resources added 1c to 7c thanks to growing interest in its Lake Grace gold prospect in WA which is in the general vicinity of Explaurum’s Tampia project that triggered a takeover bid.

 

  • Boss Resources put uranium back in the headlines with a claim that the redevelopment of the Honeymoon project in South Australia would be Australia’s next uranium mine thanks to a positive feasibility study. Boss added 0.7c to 5c.

 

  • Blackstone Minerals added 5c to 21c after reporting 1.3% nickel over a 60m intersection from drilling at the King Cobra prospect in Vietnam, and

 

  • Strike Energy reported progress at its Perth Basin oil and gas project including approval for the next exploration well, news which lifted the stock by 2c to 20c, but with Credit Suisse forecasting a future share price of 27c.

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