In 2021, there was a whopping US$21.3B in M&A activity – the second-highest level in history, with around 38M ounces acquired over 44 separate deals. And analysts predict that 2022 will see the industry continuing to consolidate as miners look to gain control of a shrinking number of producing assets.
Most of the M&A transactions that we’re seeing involve large producers taking over smaller, single-asset, gold companies. Some of the major deals we saw last year included the $10.62B merger between Agnico Eagle Mines (NYSE: AEM) and Kirkland Lake Gold (TSX: KL), which is expected to close in the first quarter of 2022 to create Canada’s largest gold producer. Other major deals from 2021 include the US$2.78B acquisition of Pretium Resources (TSX: PVG) by Newcrest Mining (ASX: NCM), and the US$1.44B acquisition of Great Bear Resources (TSXV: GBR) by Kinross Gold Corp. (TSX: K).
The gold sector is currently facing a serious reserve crisis alongside a drop in new gold discoveries. These factors combined are proving to be a big motivation for companies looking to grow their valuations. In the decade starting in 2010, the gold sector saw a significant decline in discovery rates alongside a slump in exploration investment. During this time, 16 of the world’s top 20 largest gold miners saw overall production years falling as well.
What we’ve seen over the past year is that the larger miners are increasingly looking for smaller companies that have active or producing mines and high-quality projects. John Burzynski, executive chair and CEO of Osisko Mining Inc. (TSX: OSK), said, “The few assets left are what people have to reinforce their depleting reserves. Otherwise you’re looking at seven or so years to drill out a new deposit.”
The focus for many of the major gold companies is in single-asset companies as this factors in cost inflation. Michael Jalonen, an analyst at Bank of America, noted, “We think that gold majors may seek to replace older, higher cost (and hence most exposed to inflationary pressure) assets, effectively ‘bolting on’ mid-tiers with a single quality, lower cost asset.”
The World Gold Council believes that gold will be facing similar dynamics to those of 2021, with inflation remaining high due to monetary and fiscal policies that have been implemented due to the COVID-19 pandemic. Higher inflation rates mean that gold demand will remain in place to be used as a hedge.
What effect these factors will have on M&A activity over the longer term, however, remains to be seen.
