Gold Miners ETF (GDX)

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Another proposed major miner merger lifts the gold complex
By: David Erfle | June 3, 2022

In a sector where investor confidence is extremely low, mining companies re-kindled efforts last year to explore alliances and partnerships to bring promising projects online and share the risk between parties. Depleting gold reserves and asset scarcity, along with market pressure to bulk up company valuations, sent larger miners out seeking deals to boost growth and profitability.

As covid restrictions were being lifted, deal flow among gold miners increased significantly into late 2021 with the value of the top five gold mergers totaling $16.1bn.The volume of mergers and acquisitions (M&A) jumped last year as well, with the largest being the $10.6bn combination between Agnico Eagle Mines (AEM) and Kirkland Lake Gold announced in late September.

While there was a rush for deals directly followingthe announcement of this high-profile merger of equals, M&A activity slowed in the mining sector after Kinross Gold (KGC)forked out $1.4bn for Great Bear Resources in December. In fact, M&A deal flow had mostly dried up in the mining complex until this week.

On Tuesday, South African mining firm Gold Fields (GFI) announced a deal to buy Canada's Yamana Gold (AUY) in a $6.7bn, all-share deal. The proposed combination would turn two senior gold miners into the world's fourth largest producer.

The new Gold Fields could see its total output climb to 3.8 million ounces from 2024, which would make the company the third-biggest gold miner, CEO Chris Griffith said. Within a decade, Griffith sees Gold Fields potentially increasing production to 4.8 million ounces.

If the deal is approved, Gold Fields shareholders will end up with 61% of the combined $15.6 billion company, and Yamana Gold shareholders the remaining 39%.Gold Fields said Yamana's board has unanimously approved the deal, which is expected to close in the second half of 2022.

Since the 2010-2011 industry acquisition wave took place at a major top in the gold complex, global gold miners have returned to fundamentals and balance sheet health, over adding ounces at any price. After the industry acquisition wave during the previous gold boom left a legacy of over $80 billon of write-downs when gold prices crashed,recent M&A activityhas been taking place when sentiment is low and gold miners are on sale at depressed levels.

Just ahead of the Agnico/Kirkland deal being announced in late September of last year, the GDX struck a wash-out low of $28.33. The global gold miner ETF has yet to revisit this level, while printing a series of higher lows for the past eight months. In this space directly following the deal, I mentioned that we may look back on the high-profile Agnico/Kirkland deal announcement being instrumental in creating another significant bottom in the mining space.

As opposed to a flurry of over-priced deals that took place during a major mining cycle peak in 2010-2011, the high-profile Barrick/Randgold merger announcement in September of 2018 became the catalyst thatstruck a significant bottomin a deeply oversold mining complex as well.

Two weeks previous to the Barrick/Randgold announcement, the GDX struck a low of $16.69 in mid-September. This marked a significant low after a 2-year correction of out-sized sector gains from January to August 2016. After which, the global miner ETF proceeded to nearly double in 12 months.

The recent consolidation of the mining sector has just entered its 22nd month after peaking in August of 2020. Technical confirmation suggesting a GDX low may be in place would be a weekly close above $35 with strong volume.

Meanwhile, the GDXJ has been trending upwards after reaching a lower low on long-term support at $35 in mid-May. Up-sessions have been taking place on higher volume than down-sessions, signaling investor accumulation in the higher risk junior ETF. Technical confirmation suggesting a GDXJ low may be in place would be a weekly close above $47 with strong volume.

Just as the aforementioned high-profile deals began a wave of sector deal flow, I expect the proposed Gold Fields/Yamana merger to spark more M&A activity in the mining space and continue on a positive course into Q3. And in turn, may provide the catalyst to bring some much-needed generalist investor capital back into the mining space.

In an interview after the agreement with Gold Fields was announced on Tuesday,Yamana executive chairman Peter Marrone said the company considered other options before agreeing to be acquired by Gold Fields. This suggests there are discussions for other prospective deals in the gold industry.

"We cannot be, and should not be, the only company that is considering being part of something bigger," Marrone said. He also mentioned discussions in the industry seem to be taking place. "Anecdotally, they've been taking place with us, so that suggests they've been taking place more broadly as well," he said.

While underground gold reserves held by major mining firms continue to be low and falling, new reserves are becoming increasingly harder to find as resources are used up, and exploration has become more costly. Major mining companies have a few ways to remedy their shortages. They must either discover new underground resources through exploration, or acquire them via the takeover of junior development companies.

After years of underinvestment during the previous bear market, global miner production profiles are under pressure which makes further M&A inevitable during the next few years. The current situation in the mining space has provided an opportunity for global mining companies using strategic M&A to position themselves in becoming the clear winners during the next decade.

This is a good time for resource stock speculators to take advantage of the current weakness in the mining complex to perform proper due diligence on a carefully selected watch list of quality juniors. If you require assistance in choosing a basket of M&A candidates, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, pleaseclick here for instant access.

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