Chinese interest leads to uptick in gold M&A deals

Acquisition of gold assets by Chinese buyers soared during the first six months of this year, fueling a record surge in the yellow metal price and a rapid depletion of reserves globally, even as merger and acquisition deals in the commodity hit a high in the second quarter of this year.

The total transaction value of mergers and acquisitions during the April-June period reached $2.86 billion, involving 12 transactions and was nearly double the level seen in the first quarter of this year, said a research report from Bank of America Securities.

With gold prices continuing to remain at a high level and amid an urgent need to replenish reserves, the bank expects no letup in the deal momentum during the second half of the year, with activity concentrating on assets already in production or nearly in production.

Zhu Yi, a senior analyst for the metals and mining sector at Bloomberg Intelligence, believes that the deal momentum would offer good opportunities for Chinese companies looking to buy high-ore-grade overseas mines to increase output. The need to replace mines with exhausted reserves, together with the higher gold prices will act as catalysts for more M&A deals, she said.

Amid growing concerns about the global economic outlook, geopolitical risks and the sporadic resurgence of the novel coronavirus epidemic, prices of the yellow metal have been rising as safe-haven buying continued to spur gold to greater heights. Gold prices hit $1,944.68 per ounce on July 27, breaking the previous record of $1,921.15 seen in September 2011. Prices have risen by about 25 percent so far this year, according to data from Shanghai-based market tracker Wind Info.

Bloomberg Intelligence believes that gold prices may continue to increase in the second half of this year on stronger safe-haven demand if the global economic recovery continues to be disappointing.

According to Zhu, Chinese companies have already been investing overseas for gold assets to ensure safe supply of raw materials, such as Zijin Mining's purchase of Nevsun Resources and Guyana Goldstrike, Norton Gold Fields.

"Developing the acquired mines economically and resolving the local political, community issues are potential risks," she said.

Zijin Mining, one of China's biggest State-controlled gold producers, said it would acquire Toronto-based Guyana Goldfields for 1.7 billion yuan ($245 million), after wrapping up its purchase of Continental Gold in March. Guyana Goldfields Chief Executive Alan Pangbourne said in a statement that the all-cash offer from Zijin is an excellent outcome for Guyana Goldfields' shareholders. Zijin has also agreed to provide Guyana Goldfields with a $30 million loan to finance ongoing operations and for other liquidity needs, according to Reuters.

The deal marks the latest acquisition of a Canadian resources company by a Chinese gold firm after Shandong Gold Mining, one of China's biggest gold producers, entered into an agreement to acquire Toronto-listed TMAC Resources for around $165 million.

TMAC President and CEO Jason Neal said Shandong Gold, which produced 40.12 metric tons, or 1.29 million ounces of mined gold in 2019, has the financial strength, technical capability and long-term vision to maximize the value of the Hope Bay camp.

Zhu said mergers and acquisitions in the global gold industry increased in 2019, following the merger of Barrick Gold and Randgold in 2018 and divestments by several firms, such as Australian miner Evolution Mining acquiring Red Lake gold complex in Canada from Newmont Goldcorp.

According to Bank of America, the first half of this year was one of the best periods to be a buyer of gold companies, mines and projects, as five of the transactions with reserves that took place in the second quarter of the year were priced at a 23-percent discount to the prevailing gold price, below the historical range of－20 percent to +10 percent.

"For gold company transactions, acquisition prices, relative to the prevailing gold price, were on average at the lowest level since 2011 and the second lowest since 1998," it said. The bank said it sees production profiles under pressure and reserves in decline after years of underinvestment.

By the end of last year total gold reserves of global gold producers amounted to 612 million oz, down 30 percent from the peak of 875 million oz at the end of 2012, equating to declining reserve life indexes, it said.