More rationalisation in global gold sector

The second multibillion-dollar takeover in the gold industry in a year will see South African miner Gold Fields buy Canada’s Yamana Gold in an all-share deal worth $US6.7 billion that will make the combined company the world’s fourth largest gold producer.

Under the terms of the deal, Yamana’s shareholders will receive 0.6 of a Gold Fields share for each outstanding share in Yamana, representing a 34% premium to its average share price over the past 10 days.

Gold Fields investors didn’t like the deal terms and their dilution, sending the shares down 22% on Tuesday for the US-listed securities.

As well investors remain worried about the impact of the strengthening greenback which is making gold (and other commodities) more expensive for foreign buyers. Higher Treasury and other market rates also weaken any appeal of holding yield-less gold.

Despite the recent drop, prices remain well above pre-pandemic levels. It has traded consistently above $US1,800 over the past two years having had two small bursts above $US2000 an ounce). Rising inflationary pressure, the war in Ukraine and recessionary fears should continue to provide support.

But the fact that Gold Fields is using its own paper and not using cash in the terms (and taking on more debt and interest payments) should help investors accept the logic of the deal, especially as dividends are likely to continue.

Shares in Yamana Gold naturally did better – ending up 0.7% after being 6% higher on Tuesday at one stage.

This deal follows the closing of the previous mega deal – the $US10 billion all paper takeover of Kirkland Gold (which owns the rich Fosterville mine in Victoria) by another Canadian company, Agnico Eagle.

Both deals have a small Australian element – mines with no overlap between the two merging groups, meaning no pressure to rationalise by selling off small operations.

That was the situation in the Agnico Eagle-Kirkland Gold deal.

The combined company, which will be based in Johannesburg, will have a market value of $US15.9 billion. Gold Fields shareholders will own around 61% of the miner’s stock, while Yamana holders will own the remaining 39%.

It will control 14 mines around the world – principally in Australia, Canada, Africa and South America.

Gold Fields will jump to fourth place globally in terms of gold production, behind Newmont, Barrick and Agnico Eagle.

Yamana doesn’t have any assets in Australia, but Gold Fields does.

Gold Fields’ mining assets in the Australia include a 100% interest in the St Ives, Agnew and Granny Smith mines and a 50:50 interest in the Gruyere JV project with Gold Road Resources located in the Yilgarn area of Western Australia. Gold Fields says it had gold resources at end of 2021 of just over 20 million ounces.

Yamana has a rich list of new mines planned, which helps explain the Gold Fields approach.

The Toronto-based miner’s asset portfolio includes the development-stage Wasamac project in Quebec, the Jacobina gold mine in Brazil, Cerro Moro gold-silver operation in Argentina, and two early-stage projects in Chile. It also owns a 50% stake in Malartic, Canada’s largest operating open pit gold mine. Agnico Eaglew owns the other half of this mine.

Besides its Australian mines, Gold Fields has operations in West Africa and the Americas, has only one mine left in South Africa — South Deep.

Its portfolio includes three operations in Ghana, the Cerro Corona mine in Peru, and the Salares Norte project in Chile, where the company is facing environmental problems in a country where a change of government has elevated such issues to top of the list concerns.

Based on 2021 production, the combined group would have a 3.4 million ounce ouput, as well as an average 25-year reserve life.

The new Gold Fields could see its total output climb to 3.8 million ounces from 2024 as if the Salares Norte mine overcomes the latest problems and begins contributing to overall production.

On present figures, that would make the merged company the world’s third-biggest gold miner if those new mines start up by 2024.