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Newmont Mining’s $10 billion shopping spree shows ‘consolidation is necessary’ to deliver value, growth among gold miners

DRDGOLD CEO Niel Pretorius says ‘more consolidation across the board’ is likely to start taking place in the gold space

Gold bars and a ball of gold
Newmont Mining's acquisition of smaller rival Goldcorp will create the world’s biggest gold producer by output

Newmont Mining Corp’s (NYSE:NEM) planned acquisition of Canadian rival Goldcorp Inc (TSX:G) for $10 billion shows that consolidation has become necessary and will deliver value and growth to shareholders, said mining company chief executives.

The deal will create the world’s biggest gold producer by output.

“Large gold miners are no longer capable of delivering value and growth organically ounces in existing mines are becoming harder and more expensive to mine. Hence, to deliver into the value growth expectations of their shareholders, consolidation has become necessary,” DRDGOLD CEO Niel Pretorius told Proactive Investors.

READ: Newmont Mining to create world’s biggest gold producer by output with $10bn deal to buy Goldcorp

Pretorius knows exactly what he is talking about as DRDGOLD Limited (NYSE:DRD) (JSE:DRD), one of the oldest continuously listed miners on the Johannesburg Stock Exchange, recently acquired gold and platinum miner Sibanye-Stillwater’s West Rand Tailings Retreatment Project (WRTRP).

According to analysts, the acquisition transforms DRDGOLD in one stroke giving it a platform from which to grow aggressively into Africa and other commodities. It also cuts overhead unit costs through increased production and puts an end to DRDGOLD’S single asset operating risk.

DRDGOLD wants to bring the high-grade tailings dumps into production by early 2019. The new West Rand crown jewel virtually doubles the miner’s gold reserves, giving it immediate access to facilities that can generate cash for it in a matter of months.

Growth and cleansing process

This is the second high-profile merger in the mining industry since Barrick Gold agreed to buy Randgold Resources in September last year to cut costs.

“This second mega-merger highlights the difficulty for large mining companies to replace ounces. To reverse the forecasted trend of less production back into a grow story they apparently need to acquire other companies to replace and grow ounces and production,” said Gold Resource Corporation (NYSEAMERICAN:GORO) CEO Jason Reid.

Reid also saw it as both a “growth and cleansing process” for the industry.

“It’s interesting in this case as well as the Barrick/Randgold mega-merger that both deals announced divestitures of the survivor company’s consolidated assets," he told Proactive. "Most likely the planned divestitures are the marginal or non-profitable mining operations. It looks to be both a growth and cleansing process for the industry.”

READ: Gold Resource declares December dividend

Mining executives say that falling gold reserves and higher extraction costs have prompted miners to look for cost efficiencies.

“The strategic rationale for combining Goldcorp with Newmont is powerfully compelling on many levels,” said Goldcorp CEO David Garofalo.

The combined company is expected to produce 6 million to 7 million ounces of gold over the next 10 years. In 2017, Newmont produced 5.3 million ounces of gold, while Goldcorp mined 2.6 million ounces.

Their reserves and resources will represent the largest in the gold sector and will spread through mining jurisdictions in the Americas, Australia, and Ghana.

Expect further consolidation

“As the larger companies reset margin and increase production through consolidation, the smaller operators will become increase expensive and uncompetitive. More consolidation across the board is likely to start taking place,” said DRD's Pretorius.

Similarly, Gold Resources' Reid said most likely this trend will continue as a mean to show shareholders “a growth story while simultaneously getting rid of marginal operations.”

"We view the deal as a further positive signal of an inflection point in the mining industry. With increasing precious metal prices and improving investor confidence, we will likely see an acceleration of merger activity. We announced our acquisition of Beadell Resources (BDR: ASX) on Sep 23, the night before Barrick and Rangold, and look forward to closing next month, creating a new growth-oriented intermediate precious metals producer," said Great Panther Silver Ltd (TSX:GPR) (NYSE:GPL) CEO James M Bannantine.

Shareholder meetings to approve Vancouver-based Great Panther’s acquisition of Australia-based Beadell are scheduled for February 11 in Vancouver and February 12 in Perth.

Great Panther agreed in September to acquired Beadell for $105 million. 

Contact Uttara Choudhury at uttara@proactiveinvestors.com

Follow her on Twitter@UttaraProactive 

-- (Updates with comments from Great Panther Silver CEO James M. Bannantine) -- 

Quick facts: Great Panther Mining Limited

Price: 1.08 CAD

Market: TSX
Market Cap: $381.33 m

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