Goldcorp-Newmont Deal Points to More M&A

Source: Rick Mills for Streetwise Reports   01/16/2019

Rick Mills of Ahead of the Herd dissects the conditions in the gold industry that led to the Newmont-Goldcorp merger and point to further consolidation in the industry.

More gold mines will be going on the block thanks to a blockbuster gold mining company tie-up announced Monday. And major gold companies will also be looking to acquire large, preferably high-grade deposits, due to the ever-present problem of depleting mine reserves, as extraction costs become more expensive and profit margins squeezed without a significant rise in the gold price.

These are the two main takeaways from the merger of Goldcorp and Newmont Mining which creates the largest gold company in the world—knocking “New Barrick” (the merged Barrick Gold and Randgold) off the top of the pedestal.

The consolidation started with the takeover of Africa-focused Randgold by Barrick in September; the all-share deal was worth $6.5 billion. After years of languishing gold and gold mining stock prices following gold’s record price of $1,900 an ounce in 2011, some of the biggest gold miners are finally ready to raise the white flag—overwhelmed by eroded profit margins amid (relatively) low gold prices compared to the 2011 top, and higher costs of production.

The gold price was down 5% in 2018 due mostly to the appreciation of the U.S. dollar throughout last year and steady demand for U.S. Treasury bills (for more on that read our Gold and the great stage of fools). More importantly though, gold is getting harder to find.

Mine production falling

The mined supply of the precious metal is shrinking as most of the “low-hanging fruit” has been mined and the rest is either in remote locations or buried deep in the earth, meaning higher extraction costs.

2016 was the first year that mine production fell since 2008. In spring 2018 the World Gold Council in its annual gold trends report said that total gold supply slipped in 2017 to 4,398 tonnes—a drop of 4% from 2016. Mine production was about the same as last year, 3,268.7 tonnes, but recycled gold fell 10% to 1,160 tonnes. Key gold producers that saw drops in 2017 were China and Tanzania.

Global gold-mine discoveries reached their peak in the early 1980s according to data from specialists MinEx Consulting.

In the first half of 2018 output the top three gold miners, Barrick, Newmont and Goldcorp, fell 15% compared to H1 2017, at the same time as the oil price climbed, meaning cash flow fell off a cliff.

Falling production has been a trend for some time; that will eventually signal a move up in price.

South African gold production has plummeted below 250 tonnes compared to 1,000 tonnes in the 1970s, and China, the leading gold producer, is the only country to increase production in recent years, notes Goldcore via ZeroHedge.

Lower grades, higher costs

Why is production falling? For the most part it’s due to lower grades. In 1998 Barrick was producing gold, mostly from its Nevada operations, at 9.6 grams per tonne. As Barrick added more mines its production rose, peaking in 2006 at 8.6 million ounces, but its average yield was 1.71 g/t. The company’s production and grades have both fallen since then, producing 5.3 million ounces in 2017 at 1.68 g/t.

The lower grades have meant production costs have risen significantly. As shown in the slide below, in 1998 Barrick needed 55 loaded trucks a day to move 2.3 million ounces at its Goldstrike and Cortez mines. In 2017 it had to load 220 trucks per day to produce the same amount of gold. That’s a four-fold increase in the amount of ore needed to be transported, resulting in much higher fuel, labor and processing costs.

MINING.com reported that gold mining costs are up 22% since the gold price bottomed out in the first quarter of 2016.

Victims

Between the first half of 2017 and the first half of 2018, production from the top three gold miners—Barrick, Newmont and Goldcorp—fell 15%.

( Companies Mentioned: G:TSX; GG:NYSE, NEM:NYSE, )