The past few years haven’t exactly been that great for the various gold stocks. In fact, it’s been pretty lousy.
After gold prices crashed and stayed low for what seemed like a decade, the sector was basically dead money. The various gold miners were forced to pick up the pieces, pay down high debt loads and scrap by.
But you wouldn’t know that when looking at the gold stocks recently. The sector is a hotbed of activity as gold prices have surged higher. It’s quickly becoming a hotbed of merger-and-buyout activity as well.
That includes the love triangle between Barrick Gold (NYSE:GOLD), Newmont Mining (NYSE:NEM) and Goldcorp. (NYSE:GG). The trio of top miners is locked in a battle of takeovers, hostile bids and saber rattling. The outcome of which could send the rest of the gold stocks into a tizzy.
For investors looking seriously at gold, what happens to GOLD, GG and NEM are very important.
Rising Prices, Rising M&A for the Gold Stocks
As concerns about the health of the global economy are starting to bubble up to the surface, gold is starting to regain its luster. These days, an ounce of gold will set you back around $1330 per ounce. That’s far cry from its peak, but still a very good increase from its post-recession lows.
Perhaps, more importantly, it’s at a level that the various gold stocks feel comfortable about turning a profit and making some big waves in the sector. With average all-in cash costs lower and precious metal prices much higher, the major gold stocks are opening their checkbooks and hunting for deals.
This started with Barrick at the end of last year.
Barrick made the move to acquire rival Randgold Resources for a cool $18.3 billion share-for-share deal. That buyout created the world’s biggest gold mining firm. A firm that now owns five of the world’s top tier one gold mines.
The gave GOLD a huge advantage over its super-major rivals. So, naturally, other top gold stocks couldn’t sit ideally by. With that, Newmont made a bid for struggling Goldcorp for a stock-for-stock transaction valued at $10 billion. That deal would create a worthy rival to Barrick and hold an equally impressive portfolio of mines, reserves and offer on the strongest dividends among gold stock.
Here is where it gets interesting.
Barrick decided that this NEM/GG deal would be detrimental to its bottom line and the threat wouldn’t be easy to brush off. On that note, GOLD decided to make a hostile bid for Newmont for a whopping $17.8 billion in stock.
If the buyout is successful, the deal would create the world’s largest gold company with a value of around $42 billion at current market prices. The mega-sized gold stock would hold assets on almost every continent — including Australia, Africa, the U.S. and Latin America.
This isn’t the first time that Barrick has tried to court Newmont in a merger/buyout. However, all other attempts haven’t been successful mostly due to culture clashes at the two gold stocks.
This time may not be any different as CEOs for both firms have stepped up their war of words. However, some major shareholders have backed the proposal.
What It Really Does for the Gold Stocks
If the Barrick/Newmont deal does go through, the size and scope of the new firm would put some fear into the rest of the sector. The combined company would hold immense scale, low costs and be able to pull around $7 billion in synergies. That’s impressive. And even if GOLD isn’t able to get its hands on NEM and Newmont buys Goldcorp, you’re still looking at two massive gold producers.
For everyone else in the sector, this a huge problem. Trying to compete with such massive entities tends to be a losing proposition. The solution to the problem is to get bigger themselves. All in all, this will lead to more M&A down the road.
Top gold stocks like Agnico-Eagle Mines (NYSE:AEM), Kinross Gold (NYSE:KGC), Yamana Gold (NYSE:AUY) and even AngloGold Ashanti (NYSE:AU) are all now going to have to think big and think about how to grow in order to compete with the supermajors.
For investors, this creates an interesting scenario. Already, many gold stocks have moved higher over the last year as prices for the precious metal have increased, profitability has improved and the situation in the sector isn’t so dire.
But now, with the majors starting to wheel and deal, and the middle tier firms being forced to think about acquisitions as well, the whole sector should start to trade at a bit of a buyout premium.
This is sort of exactly what happened back in 2006/2007 when the last round of major gold stock M&A happened.
Considering Gold Stocks for Your Portfolio
So, what’s the portfolio answer?
These ETFs feature a wide swath of those firms that could be doing the buying and those that could be bought-out over the next few quarters. Moreover, the ETFs makes it easy for investors and there’s no need to pick specific winners.
All in all, the Barrick/Newmont/Goldcorp saga is far from over. But its real contribution to the gold mining sector is more M&A. Mid-tier and smaller rivals will be forced to grow in order to compete. For investors, that should bring up the values of almost any gold stock with real assets and production.
At the time of writing, Aaron Levitt did not hold a position in any stock mentioned.