Creating value for shareholders

Rebecca Bothamley, partner at law firm Mayer Brown International, talks M&A in the gold mining sector
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Rebecca Bothamley

Mikhail Stiskin, the senior vice president of finance and strategy at PJSC Polyus, Russia's largest gold producer and holder of the world's second largest gold reserves, remarked earlier this year that he was braced for a "wave of mergers and acquisitions" in the gold mining sector.

Stiskin was reacting to two recent mega-deals in the industry: the first, Barrick Gold's US$6.5 billion merger with Randgold Resources, which completed in January 2019, and the second, the $10 billion acquisition of Goldcorp by Newmont Mining less than four months later, creating two giants of the gold mining industry.

There has been much back and forth between the two companies over the last year, with Barrick pursing a $17.8 billion takeover of Newmont in March 2019 that was shelved for a 'historic' joint venture, which saw the two companies merging a large part of their Nevada business.

Stiskin went on to predict that we would begin to see a ripple effect, with similar strategies being embraced by smaller, mid-tier mining companies. This prediction has seemingly been borne out over the second half of the year.

Osisko Gold Royalties announced in September 2019 that it had entered into an arrangement agreement with Barkerville Gold Mines to acquire all of the issued share capital of Barkerville. The consideration was paid to Barkerville's shareholders solely by way of shares in Osisko and represented a total equity value to the selling shareholders of approximately C$338 million (US$251 million).

Similarly, on a smaller scale, Australia's Titan Minerals has recently launched a second formal takeover offer for Canada's Core Gold (the first having been blocked by the British Columbia Supreme Court). Titan has justified its commitment to the acquisition on the basis of a belief that it will deliver both a "substantially stronger balance sheet" and a "more extensive and diversified asset base" than would be possible through organic growth alone.

A readiness to engage in such activity extends throughout the sector. Less than a month after Stiskin's prediction, Canada's Hunt Mining Corp announced its successful takeover of Patagonia Gold. The consideration of £17.8 million (US$23 million) was paid in both cash and shares by Hunt Mining.

ebecca othamleyRebecca Bothamley

Other examples, such as Chaarat Gold Holdings having acquired Kapan Mining and Processing Company CJSC at the beginning of this year for $55 million, demonstrate that growth in the sector increasingly requires M&A activity, as well as organic growth. Described by Chaarat as "an important milestone in achieving Chaarat's goal of building a leading emerging markets gold company", the deal again demonstrated the appetite amongst smaller firms to partake in ambitious corporate transactions. One of Chaarat's stated reasons for pursuing this acquisition was that it would "advance Chaarat's ability to implement future mergers and acquisitions".

Mayer Brown has seen similar motives drive acquisitions having acted for Toro Gold on its recent sale to the Australian listed Resolute Mining, for a total consideration of $274 million, comprised of $130 million of cash and $144 million of shares in Resolute. Just weeks before this acquisition was announced, the managing director of Resolute, John Welborn, had announced that Resolute was planning to list on the London Stock Exchange, viewing it as "a platform to grow", in order to connect with investors that it had not been able to previously.

Looking to the future, the CEO of Sibanye Gold, Neal Froneman, has publicly touted the idea of the company listing on the New York Stock Exchange in 2021, stating that "looking offshore for growth is just a logical extension of where we are now". With Sibanye already having acquired the platinum mining company Lonmin earlier this year, such a move would facilitate the access of another mid-market mining company, with a proven appetite for M&A-driven growth, to a previously unavailable and/or unattainable pool of investors.

Rachel Speight, a finance partner at Mayer Brown, previously discussed rising resource nationalism for Mining Magazine and highlighted the regulatory hurdles that have the potential to derail M&A activity in the mining sector. Regulatory concerns and government intervention is always a concern, but with the outlook for gold price still positive and the amount of M&A activity in the gold sector this year, many counterparties seem to be willing to take on more risk in that respect.

From the sheer volume of M&A in the gold mining sector that we have seen this year, agreement with Stiskin's assertion that the gold mining sector is now "clearly open to M&A" must naturally follow, especially for small to mid-market mining companies who, according to Tom Palmer, the president and CEO of Newmont Goldcorp, will be the drivers of "countless more" mergers once the dust has settled on the M&A activity of the largest companies. Such large-scale M&A leaves many assets to be sold off as part of the harmonisation of their business activities.

In an industry that has, by its own admission, "been criticised for its short-term focus, undisciplined growth and poor returns on invested capital", such aggressive corporate manoeuvres are seen, as stated by Mark Bristow, the CEO of Barrick Gold as an opportunity to "create real value for all stakeholders".