For major gold mining companies, there’s at least one silver lining (no pun intended) that can be taken from the continued collapse of the sector under this particularly low price environment. Even with this dismal context, the highly unfavorable market can be used as an opportunity to reorganize operations. Since nobody expects the market to shoot up all of the sudden, why not focus on getting leaner, becoming more efficient, or realizing greater economies of scale?
For the few miners that aren’t struggling to stay above water with their finances, this is precisely how they’re using the downturn to their advantage.
Making the Most of Gold Mining M&A
According to industry analyst Michael Curran, the dim prospects for rising profits in the near future has made it a logical time for M&A activity for both small and large firms. Curran notes that, “[s]ome of the bigger producers are probably in acquiring mode.” At the same time, many smaller miners are merging together in order to more effectively develop new projects even when they are short on cash. This consolidation—whether small firms banding together or big fish swallowing up smaller ones—is natural in the current environment as gold mining companies search for high-grade assets to replace maturing projects. It also hasn’t helped that outside financing for the industry is a paltry $400 million in 2015; by comparison, the industry raised over $4.6 billion just 3 years ago.
One of the most recent moves was by Galane Gold Ltd. (CVE:GG), which acquired Galaxy Gold Mining Ltd.’s South African gold mining operations. Galane is hoping that Galaxy’s mines will return to an annual output of 50,000 oz. A report conducted in 2011 put forward an estimate of over 882,000 oz of inferred gold at the site.
Curran also pointed out that if recent history is any indication, gold prices are hardly ever static or stagnant. Even this year, gold has fluctuated in a fairly wide $200/oz trading range. He suggests that it wouldn’t therefore be surprising to see gold’s volatility to bring prices back up to $1,300 per ounce by the end of 2016. You can read more of what the expert Curran has to say about junior miners here on Mineweb.
Newmont, Freeport Partnering in Indonesia
There is also a big development between two of sector’s biggest players, Newmont Mining (NYSE, SWX:NEM) and Freeport-McMoRan (NYSE, SWX:FCX). Freeport has been bogged down in negotiations with the Indonesian government to get authorization for extracting and taking raw materials out of the country, causing a stoppage in exports for over 9 months last year. Not surprisingly, Indonesia is keen on keeping more of the profits from its valuable natural resource deposits, and has been pressuring foreign-based miners to develop refining facilities within its borders.
In response, Newmont secured a new 6-month license to run operations at the massive Grasberg Mine after committing to developing a domestic smelter in cooperation with Freeport. This lifted a ban on Newmont sending its mined materials (predominantly gold and copper) abroad.
Grasberg, now a joint venture between the two companies, saw a million oz of gold output in 2014, but production has been significantly lower this year due in part to El Nino.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.