High gold and share prices indicate it should be boom time for mergers and acquisitions.

Data from S&P Global Market Intelligence shows the market is heating up. So far this year, there has been an aggregate of US$3.9 billion in gold transactions in eight deals representing about 31.9 million ounces of gold reserves, with buyers paying an average of $123/oz.

In 2019, the firm recorded 12 gold deals for an aggregate $18.7 billion representing about 98Moz of reserves, at an average of $191/oz, although these figures are distorted by the $10 billion Newmont-Goldcorp deal.

Tellingly, the deals so far this year are happening at much cheaper prices than the 10-year average of $202/oz paid for reserves. It possibly would have been more had COVID-19 travel restrictions not grounded technical diligence teams. "There has been a noticeable uptick in behind the scenes activity and as the COVID-19 travel restrictions ease off, we will see an even greater number of transactions being announced. The increase in the gold price and company share prices has given both for buyers and sellers the confidence to transact," a Canadian investment banker told Mining Journal on condition of anonymity.

"The Barrick and Newmont deals precipitated a suite of M&A transactions," S&P director metals & mining research, Mark Ferguson, told Mining Journal.

"They have spurred other companies to interrogate the M&A market to see what is strategic. A lot of smaller companies are moving in that vein with a lot of activity this year in the mid-tier range. We are going to see more deals this year but it is hard to surpass the total amount acquired last year unless there were mergers of other top producers."

Things have changed though since the last bull cycle for gold a decade ago, which means the drivers for transactions have changed. Today, there are fewer specialist natural resource investors and there has been dramatic growth in passive index-linked or exchange traded funds, which give investors exposure to gold and/or gold miners without having the trouble of evaluating specific companies. It is thus increasingly important for miners to get into ETFs and indices to generate buying demand. Increasingly, that means bulking up. "The main goal of companies is to attract generalist investment capital, which has been out of the sector for almost a decade. This has started coming back but into the ETFs and GLD," David Erfle of Junior Miner Junky told Mining Journal.

Frank Holmes, CEO and chief investment officer at US Global Investors, has been preaching for several years the gospel of what he calls quantamentals, how investment algorithms are changing the investment landscape, a message he believes largely falls on deaf ears. "Ten years ago, the narrative was about NAV [net asset value]. The quant world does not buy NAV because there is no consistency. What moves stocks is building revenue and cash per share.

"If a transaction is not immediately accretive in revenue per share it does not mean anything, and the market punishes you. Buying resources to have optionality in the future is not where it's at," Holmes told Mining Journal.

For evidence, Holmes says people need look no further than Australian gold miners. "The Australians showed it was smarter and better to sweat the income statement to get as much cash flow as fast as you can from deposits and don't worry about proving you have a 10-year mine life. Make sure that you have five years of resources and three years of production, which means you can tackle smaller deposits and can get those returns on capital. The market will reward you for higher cash flow returns on invested capital.

"Many seniors are still listening to the old [NAV] narrative. They don't want to believe it has changed," he said.

John DeCooman, SVP business development and strategy at SSR Mining, has seen this change over almost a decade of M&A activity by the company, during which it has transacted an aggregate value of more than US$4.5 billion in four transactions, which have propelled it from a small silver producer to a senior precious metals producer.

"It has been a consideration of ours over a number of years or the need to get to senior producer size with profitability to attract investors through quant funds and indices," DeCooman said. "Fewer active and retail investors are seeking mining exposure now compared to ten years ago. Our retail-institutional shareholding percentage relevance has flip-flopped from 65-35% to 35-65% over that period. However, it remains the case that the better you run the business, the more investors will want the product. Making a more appealing product is always a good thing."

How has the rise of passive investing manifested itself in the market? 2018-2019 saw two mega mergers with Barrick Gold and Randgold getting together via a zero-premium merger of equals, which arguably forced rival Newmont to hook up with Goldcorp to keep pace. In Spinal Tap parlance, Barrick and CEO Mark Bristow turned the dial up to 11 and raised a tower above the other senior gold producers, with a market cap more than three times those of other seniors, elevating the company to the ranks of diversified miners such as Glencore and Anglo American, although still paling next to diversified mining behemoths, BHP, Rio Tinto and Vale. "The mega mergers of Barrick and Newmont puts them in a different league as they are now trying to compete directly with the ETFs. They have diversified asset portfolios which mitigates some of the operational risk, and with high liquidity, so not unlike an ETF, but with sustainable dividends that sets them apart. Their balance sheets are stronger than the last cycle as the focus is on free cash flow rather than growth," Joe Mazumdar of Exploration Insights told Mining Journal.

If this is the future, one would expect the actions of Barrick and Newmont to pull others in their wake, yet in two years no third company has climbed the stairs of that tower.

The strong cash flows companies are now generating may provide the ammunition for that to change.

A handful of seniors had cash positions above $1 billion at the end of the first quarter: Agnico Eagle mines, Kinross Gold and AngloGold Ashanti, so they have plenty of dry powder. Kirkland Lake Gold is also stuffing away cash and would soon have had a billion in the bank had it not spent $380 million on share repurchases this year. But will growing treasuries be spent on M&A? "It is almost impossible for any of the seniors to do a transaction to join Barrick and Newmont as they are so big. Agnico is perhaps in the best position but is unlikely to do so as it trades at such a high multiple that they do not want to lose that, so they are not going to do a deal. There is a lot of hair on the other dogs so putting two of them together will make bigger not better," said the Toronto analyst.

Agnico Eagle SVP finance and CFO David Smith said during a Red Cloud Financial webinar on July 7 the company could be "busy for the next 10 years without having to do any M&A".

"There is no production cliff facing us in the near term. If we can't find any M&A so be it, we will be busy with brownfield opportunities we have," he said.

"There is a still a broadly conservative trend regarding premiums and valuation as the industry was badly burned by getting carried away in the last boom. There is still pressure to ensure valuations and premiums are constrained and are reflective of the fundamental value," Sander Grieve, a partner at lawyer's Bennet Jones, told Mining Journal.

"If a bigger company makes a move, it may be more to leverage their premium as a gold producer to buy a copper-gold asset from a struggling producer," said Mazumdar.

A more likely scenario is for a senior company to acquire a development stage junior with stock. "Producers switched off the drills seven years ago so some of them face an existential crisis of having to buy or eventually stop being a going concern. Kinross has had a billion in cash for quite a while and the thinking is they need to acquire a large development project. Producers have way better paper than developers so they can do a paper deal and use their cash to build a project to get cash flow," said the Toronto analyst.

"I am surprised [at market mergers between senior companies] have not happened more but the majors have shored up their balance sheet and have a lot of cash to spend and they are taking strategic positions in juniors," said Erfle. "Majors have to replenish their reserves, and I assume the cashed-up majors are looking for acquisitions. In addition, many companies have large bulk tonnage assets on their books for which they overpaid in 2009-2010 and have written down in recent years that are now economic at current gold prices."

The gravitational pull of the Barrick and Newmont deals has been more visible among the mid-tiers, with B2Gold, Yamana Gold and Kirkland Lake Gold graduating to the senior group, recently joined by SSR Mining through its merger with Alacer Gold and Endeavour Mining through hooking up with Semafo. Equinox Gold is not far behind merging and building its way there. So, are we witnessing the hollowing-out of the mid-tier? "There is a dearth of companies between the 200,000-800,000oz production level, which previously happened in Australia as Newcrest Mining bought its rivals. There is every opportunity for some of the smaller companies to move up into this space," said the Toronto analyst.

For Michael Amm at law firm Torys, the need for consolidation will incentivise smaller companies to band together.

"Smaller single-asset companies are not big enough to get attention as index admission becomes more important," he said. "There are many opportunities in the small- and medium-cap space and I think there will be a surge in those types of deals as there are too many companies at the 50,000-500,000oz/y level. Buy-side mining focused investment funds say there is too much product out there and they are clamouring for more M&A. The precedents are supportive. Look at how Equinox, Endeavour and SSR have traded since their merger announcements," said the investment banker.

S&P data show the majority of transactions so far this year are for single assets or single-asset companies. For Ferguson, this is partly explained by the reduced level of exploration in the sector as a key driver. "The lack of significant gold discoveries over the past decade or two might play into a lot of these companies looking to acquire supplemental projects or production. Gold exploration budgets will be less impacted [this year] given the gold price but they are probably still going to go down," he said.

"Most M&A will come from smaller companies seeking to grow into bigger, more diversified, free cash flow generating companies, with the potential to pay dividends," said Mazumdar. "Smaller companies like Argonaut Gold are trying to get another rung up the ladder with respect to trading liquidity to be able to talk with new investors, so we should continue to see deals involving juniors with smaller assets that could be rolled-up like Equinox did."

Argonaut is moving into the mid-tier after completing its merger with Alio Gold earlier this month, adding Nevada production at Florida Canyon to its Mexico production. It also improved its development pipeline. "Ana Paula is an interesting project for them as Cerro de Gallo is not easy from a metallurgical point of view and Magino is a white elephant," the Toronto analyst said.

Building a multi-asset company via mergers continues to be a successful model for creating value. SSR Mining has become a senior producer via this route adding Marigold, Claude Resources, Puna and now Alacer Mining. Equinox Gold is replicating that success having added Trek Mining, Newcastle Gold, Anfield Gold and most recently Leagold Mining, while the Endeavour-Semafo deal creates the largest gold miner in Africa. Yamana and B2Gold both grew in similar fashion.

Who are potential targets?

In North America, Integra Resources believes its Delamar project in Idaho, USA, is a standout, one of four projects it has identified with an economic study, less than a $500 million capex, with a mine life of more than 10 years and with annual production in excess of 100,000oz of gold-equivalent. The others are Marathon Gold's Valentine Lake, Sabina Gold and Silver's Back River and Monarch Gold's Wasamac, all in Canada. Also in Idaho is Liberty Gold, which has an open-pittable heap leach oxide gold project with a scale which could be of interest to the majors.

However, a rising gold price environment may change seller motivation. "Recent M&A [TMAC Resources, Guyana Goldfields and Cardinal Resources] has seen capitulation from the seller who did not want to run the business anymore. Valuations are starting to pick up, so it is not as cheap to pick-up companies with resources as it was six months ago. Many companies can now raise money to generate catalysts such as drilling. They think their valuation can only go up in the current market environment so may sit and wait for a higher bid price," said Mazumdar.

Additionally, some developers, such as Orla Resources and Bluestone Resources, are intent on going into production, which is anathema for many North American juniors. Even Corvus Gold, which for years has been open about a sale being its end game, is working on production scenarios for its North Bullfrog and Mother Lode deposits in Nevada. Other projects require buyers with specific skillsets to bring them into production. "Sabina is landlocked in the Arctic and Valentine Lake is still semi-remote in Newfoundland, so the potential number of suitors who can cope with that may be less. People have been looking at single-asset companies such as Pretium Resources and Torex Gold for a long time but who wants to take on Pretium's resource uncertainty or is comfortable handling the security of operating a large operation in Guerrero, Mexico?" said Mazumdar.

Deal hesitation may also be influenced by the expectation that large companies will continue shedding assets as they pursue being fitter, leaner and focused on cash flow generation. The market has responded positively to companies it perceives as successfully executing divestment strategies such as Yamana Gold and New Gold. "Yamana has done a great job rationalising its portfolio and they are probably not done yet. New Gold, by selling Blackwater to Artemis, will realise about $300 million in value when most analysts carried the project at near zero value. They also won't have to spend hundreds of millions to bring it into production. There are a lot of asset level deals to come. Most of the bigger companies have at least one asset which we are very confident they are looking to sell in the near term," said the investment banker.

While M&A expectation is growing, COVID-19 has strangled the conference circuit where corporate business development teams kick the tyres of potential targets in face-to-face meetings with the management of juniors, as well as having serendipitous encounters in the corridors. "This will bring to bear the value of some individuals in our business with great reputations and great networks. People are more induced to engage if they know one another as there is the question of trust which develops from being in the business and knowing people. We were rarely more than one person away from making a call and having a conversation," said DeCooman.

"The lack of conferences has removed a source of ideas and meetings that get the ball rolling. But CEOs have been at home and not running around and so have had time to reflect, read more and listen to advice. There has been a new source of ideas that is more introspective. However, companies cannot do due diligence and that is really problematic for mining," said the Toronto analyst.

In this context, management teams who have previously completed transactions are coming to the fore. The former management team of Newmarket Gold resurfaced in Calibre Mining in 2019 with the Nicaragua mines it bought from B2Gold, while the former team at Atlantic Gold formed Artemis Gold and recently picked up the Blackwater project from New Gold. Investor-management groups such as the Augusta Group, Discovery Group and Oxygen Capital have a similar attraction due to their track records of growing and selling the companies under their wings. Their current wards include Bluestone Resources, Great Bear Resources, K2 Gold, Pure Gold, Liberty Gold and Solaris Resources.

China Australia penetration

The apparent reticence of senior North American companies to do deals has created space for Australian companies to make notable acquisitions.

Australian miner Northern Star Resources acquired the Pogo mine in Alaska, USA in August 2018, St Barbara bought Atlantic Gold in Newfoundland, Canada, in July 2019 and Evolution Mining acquired the Red Lake mine in Ontario, Canada, in November 2019. "Australian miners have really done well improving the quality of their mines and getting their costs down and because of the strong gold price in Australian dollars, investors have rewarded them which has strengthened their share prices. This set up a nice arbitrage for them to come for North American companies which had underperformed them. However, it is tough for them to find assets that are transformative enough for them to set up an Americas division; the juice has to be worth the squeeze," said the investment banker.

The past year has seen Chinese companies get more aggressive on the acquisition front: Zijin Mining bought Continental Gold for its Buritica project in Colombia in March and then beat out competing bids for Guyana Goldfields and its Aurora mine in Guyana. Compatriot Shandong Gold is looking to buy TMAC Resources and its Hope Bay project in Canada, and in Africa, it outbid private Russian company Nordgold for Cardinal Resources and its Namdini project in Ghana. This defeat may spur Nordgold to seek full ownership of the 2.75 million-ounce Montagne d'Or gold project in French Guiana by buying out the 45% stake held by Orea Mining.

For German newsletter writer Markus Bussler of Der Aktionar, the trend is for M&A heading for the southern hemisphere. "There are not many good projects in North America, so South America will hit the spotlight in the next five years, as will West Africa," he said during a Soar Financial webinar. Chinese companies are already executing on this.

"China got the jump on North American and Australian companies by making all cash deals for juniors and picking them up while they were still cheap. Chinese companies are looking to grow rapidly and if they see an asset that is on sale they are going to acquire it," said Erfle.

Holmes said: "China will continue to get a foothold in gold supply and production as it wants the renminbi to replace the US dollar, so it needs to get gold behind it and beef up its military."

"Chinese companies are trying to ramp up their production, size and profile in the industry although it is becoming harder as they are under more scrutiny from the regulatory perspective in the US, Canada and Australia. Given the geopolitical situation, the degree of focus and weight on bilateral issues will be greater than a year or two ago," said Amm from Torys. "China has developed semi-hostile relationships with many countries. Does Canada want to give them a foothold in the Arctic and access to the Northwest Passage through the acquisition of TMAC?" said Mazumdar.

"It is strange that we haven't seen a lot of contested deals. There would normally be more contested transactions in a hot market like this"

Both Australian and Chinese companies have focused on producing or development stage assets although Chinese companies seem to prefer troubled assets they can pick-up cheaply. Both TMAC's Hope Bay and Guyana's Aurora have struggled, resulting in the companies' share prices sliding about 95% in the year prior to the bids being announced. "China will look at assets others will not in places some may fear to tread," said Mazumdar. "For TMAC, you need to add another $500 million to the price to build a new 4,000 tonnes per day plant at Hope Bay. Cardinal's Namdini requires $350-400 million in up front capital and the modest gold recovery of 83% over the life of mine requires a lot of power for very fine grinding. Economics plays less of a role in what they are thinking as they are looking for gold production. China can pay $1,800/oz in the market for gold or dollars on the ounce for an asset operated by a company and then bring it home. Their strategy may be to add gold to the government's reserves."

This is part of the thesis Kerry Smith, gold mining analyst at Haywood, outlined in a June research note. "China has significant political power in many under-developed countries and this political power is a significant advantage to Chinese mining companies who purchase undervalued international assets," he said. Smith listed 12 producers which may appeal to Chinese miners of which five have operations in Africa, three in South America, two in North America and two in Asia. Smith also listed 12 development stage projects of which eight are in South America and three in Africa.

Development stage assets which may appeal to Chinese companies include Gold X Mining and its Toroparu project in Guyana, INV Metals' Loma Larga and Lumina Gold's Cangrejos projects in Ecuador, Jaguar Mining in Brazil and Orezone Gold in Burkina Faso. Gold X was included in an unsuccessful bid by Gran Colombia Gold to acquire Guyana Goldfields earlier this year, the logic being that its Aurora mine infrastructure could shave some $200 million off the capital development costs of its Toroparu project, making a marginal deposit much more attractive. That part of the thesis seems to still be in play as soon after the Gran Colombia bid failed, Gold X appointed Robert Friedland as non-executive chair. Jinghe Chen is a director of Friedland's Ivanhoe Mines and also happens to be founder and chair of Zijin Mining. "The appointment of Friedland means Gold X is for sale," said Holmes.

For Amm, an indication that the M&A space is only just starting to heat up is the almost total absence of post-announcement competing bids. "It is strange that we haven't seen a lot of contested deals. There would normally be more contested transactions in a hot market like this. The strong push for M&A is tinged with caution as everyone has taken the message that gone are the days of huge premiums and risky deals where people overpay. Even when the best assets come into play there will be more discipline than in the past," he said.

For Grieve, history tends to not be on the side of hostile transactions. "The challenge for hostile bids is that it means a much longer bid time, so there is pressure to come in the front door. The number of hostile launched deals completed by an alternative bidder is quite high. The rules in Canada allow for a long enough bid period for the market to get smart and so there is less opportunity for a hostile to complete a surprise bid," said Sander Grieve of Bennet Jones.