Gold Sector M&A to “Pick Up, Given the Valuations”

Gold shares were mixed on Tuesday, as the Market Vectors Gold Miners ETF (GDX) oscillated between gains and losses near $53.91 per share.  The sector’s activity mirrored that of the broader equity markets, as the S&P 500 Index seesawed between positive and negative territory near 1,458.

Notable advancers this afternoon included GDX components Harmony Gold (HMY) and AngloGold Ashanti (AU) – which rose by 4.3% to $9.52 and by 0.8% to $36.57 per share.  In contrast, shares of Barrick Gold (ABX) slipped 0.7% to $41.89 while Kinross Gold (KGC) fell 0.9% to $10.10 per share.

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While the gold sector has rallied significantly over the past six weeks – the GDX has jumped 25.9% since the start of August – shares of most mining companies have continued to lag the price of gold.  On a year-to-date basis, the GDX is up by just 4.5% while the yellow metal has climbed 13.6%.  Furthermore, the ratio of the gold price to several of the gold sector indices remains near historic lows.

As a result of the sector’s underperformance, several industry executives and investors expect merger and acquisition activity to pick up as many large-cap gold producers that have struggled to generate growth look to purchase their smaller peers at a relative discount.

Chuck Jeannes, CEO of Goldcorp (GG), stated in an interview last week that “The development-company valuations have come down to where, at least on paper, it looks like there’s some opportunities,” according to a report by Bloomberg.

Jeannes went on to say that investors have responded positively to recent pledges by the world’s largest gold miners to make better investment and operational decisions.  “It’s not ounces, it’s value,” he asserted.

The report also included commentary from Marc Sontrop, a portfolio manager at Interward Asset Management in Toronto.  “A lot of the juniors have been hard up for cash, the financing window wasn’t necessarily open,” he noted, but added that “I think we’re going to see takeover activity pick up, given the valuations.”

Randy Smallwood, CEO of Silver Wheaton (SLW) – a silver and gold royalty company – provided his thoughts on the issue as well, Bloomberg noted.  “The market is a bit gun-shy and there is a bit of a sentiment to sit on the cash and be a bit more patient before you go acquiring those growth opportunities,” he stated.  “At the same time, you’ve got these undervalued equities that are screaming out that there’s some pretty good deals out there in terms of acquisitions, so I don’t see that lasting very long.”