Open Editor's Digest for free
Rula Khalaf, editor of the Financial Times, picks her favorite stories in this weekly newsletter.
When the world's largest gold miners by market value prefer to discuss copper projects, the shiny metal may face an image problem.
This week, the price of gold hit another record high, above $2,100 per ounce. Expectations of lower interest rates in the United States and continued demand from Chinese households are two reasons behind this.
But larger mining companies, such as Newmont and Barrick, have not enjoyed the same success. Shares of Denver-based Newmont Mining Company fell 25 percent over one year. This comes in the wake of Newmont's deal to buy Australian company Newcrest last February for a higher price of $19.5 billion, which is a very high price for shareholders. Barrick shares also suffered. It has plans to build a copper and gold mine in Pakistan, which has geopolitical risks.
Unlike gold traders, stock investors demand free cash flow for stock buybacks and dividends from gold miners. Investors have little confidence in mining executives as stewards of their capital. Ironically, this disconnect between the metal and miners may lead to more deal-making.
Investors have not shunned all gold miners. Canadian company Kinross Gold, under pressure from activist investor Elliott Management, used surplus cash to buy back its shares. Its shares rose 42 percent during the same period. Agnico Eagle, ranked third, has benefited from fiscally conservative management and mining assets located in politically stable Canada.
Deals for small and medium-sized miners are likely to find favor with investors. Chinese company Yintai Gold stepped in last month to buy Osino Resources for C$368 million in cash ($272.53 million). This was topped by Osino's local competitor Dundee Resources. These small acquisitions have gilded shareholders' pockets in recent years.
The best investment returns — averaging 100 percent — occurred on purchases worth less than $2 billion, according to an analysis of 22 trades since 2018 by BMO Capital Markets. These were usually medium-sized miners who bought small miners through new ventures. On the other hand, the Newcrest merger destroyed about $1.4 billion in value.
Cheap targets abound, reckons John Hathaway of Sprott Asset Management. Some beginners reach the point where the investment needs of the projects seem overwhelming, forcing them to sell.
Small-scale miners are divided into two camps. BMO notes that some production companies, such as Toronto-listed OceanaGold, should turn free cash flow positive soon. Others need new sources of capital: Reunion Gold needs money to develop its Oko West mine in the new oil state of Guyana. This may attract venture investors, or miners with capital.
If the price of gold continues to rise, talk of deal activity will grow. Shareholders, concerned about overpaying for growth, prefer companies to scour the market for cheap assets first.
alan.livsey@ft.com
The Lex team produces timely commentary on capital trends and major companies. We'd love to hear from more readers. Please let us know what you think in the comments section below or email lexfeedback@ft.com.
