Melbourne: Global gold mining takeoversset a record this year with "chest-beating" miners chasing deals as theprice of the metal surged, boosting fees at advisory banks BMO CapitalMarkets, HSBC Bank and Merrill Lynch.
Kinross Gold Corp.'s purchase of Red Back Mining for about $7.1billion Wednesday took the value of gold deals to $32 billion this year,accounting for 38 per cent of mining acquisitions, according to datacompiled by Bloomberg. That's more than twice last year's totalfor the industry.
"The reason why we may have seen a pickup in activity this year isbecause gold prices are around $1,200" an ounce, said Greg Fournier,Hong Kong-based head of Asia Pacific region metals and mining investmentbanking at Merrill Lynch.
"If you have a view that the gold price is strong and is going to gohigher then acquiring more reserves or producing properties today makessense."
Bullion surged to a record $1,266.50 an ounce in June and is set for a10th straight annual advance, the longest winning streak since at least1920, attracting investment by fund managers including George Soros andJohn Paulson.
Further price gains and takeovers may follow, with Newcrest MiningLtd. and Resolute Mining Ltd. among potential targets, according toMidas Fund, which holds Newmont Mining and Barrick Gold.
Battle of elephants
"There's always a battle of the elephants with gold companies, theylike to be the biggest," Grant Craighead, managing director andco-founder of Sydney-based research company Stock Resource, said afterKinross agreed to buy Red Back Monday. "It's a real chest-beatingindustry."
Bank of Montreal's BMO Capital Markets unit remains the top goldadviser with nine deals worth $20 billion, according to the data. That'sfollowed by HSBC and Bank of America Merrill Lynch unit, which wasn'tin the top 20 last year. BMO Capital is also the top mining acquisitionsadviser this year.
"There is likely to be more consolidation in the medium-to long-termsas gold producers struggle to grow organically," said Evy Hambro, whooversees about $35 billion in natural resources funds for Black Rock."This is a global trend," Hambro said, whose responsibilities includeBlackrock's Gold and General Fund, which has gained an annualised 24 percent in past five years.
Gold discoveries have dropped by 4 million ounces a year for the pastthree decades, Credit Suisse Group AG's Michael Slifirski said inNovember, citing a presentation from Gold Fields Ltd.
"Gold companies have finite assets," said Richard Phillips, managingdirector of merger adviser Greenhill Caliburn Pty Ltd. "Producers areunder pressure to continue to buy or find gold to replenish theproduction pipeline and many companies look to do both."
Greenhill, founded by Robert Greenhill, agreed in March to buySydney-based Caliburn Partnership Pty for as much as $181 million. Thecompany is advising Lihir Gold, which has agreed to an $8.9 billiontakeover from Newcrest, in the second biggest gold acquisition so farthis year.
Kazakh Gold Group $11 billion bid to take over its parent Polyus Goldto create the largest producer among the former Soviet Republics is thebiggest deal this year.
Getting bigger
"Larger size means greater access to capital markets, geographic andmetallurgical diversity, with increased options to redeploy capital,"said New York-based Tom Winmill, who helps manage $120 million at theMidas Fund, which had an 83 per cent gain last year, includingdividends. There will "definitely" be more consolidation in the goldsector, he said.
Barrick, the world's biggest producer, and Newmont, the largest USgold company, have both signaled in the past two months that they mayconsider "opportunistic" acquisitions. Producers may generate more than$80 billion in free cash flow through to 2015, according to a MerrillLynch report on July 27.
To be sure, elevated valuations and restricted access to debt maydamp appetite for takeovers. Europe's debt crisis and global marketvolatility decreased the attractiveness of riskier asset classes in thefirst half, making it more expensive for companies to finance new deals."Potential acquirers and operators have been continually disappointedat how debt markets aren't functioning," said Peter Arden, aMelbourne-based senior mining analyst at Ord Minnett, an affiliate of JPMorgan Chase & Co. "It will constrain" takeovers, he said.
Gold will surge to $1,500 an ounce by the end of 2011, Merrill Lynchsaid, maintaining a forecast made shortly after Lehman Brothers HoldingsInc. collapsed in September 2008.
"The larger companies like Barrick and Newmont and Gold Corp, Kinrossin North America in particular, they are all very activeconsolidators," Merrill Lynch's Fournier.
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