The
gold mining industry has gone through some tough times in recent years. One of
the main issues have been the weak prices in the gold mining sector. Investment
journalist Simon Constable suggests that the other issues lie
in the fact that the industry has always been fragmented with a slew of
relatively small companies operating. It’s problematic because the more small companies
involved, the higher the competition between the firms, which can lead the
profits to eroding over time.
But the recent increase in the price of gold
this year has triggered a surge in mergers and acquisitions, which could
eventually lead to a seismic shift, changing the industry forever. It’s not
necessarily a bad thing, as Australian-based Macquarie Bank claims the rush
might just be the push that the industry needs to save it from becoming so
overly fragmented.
The recently finalised Barrick-Randgold deal,
Newmont Mining Corp. announced it was buying Goldcorp, Inc. for more than £7
billion ($10 billion) and once completed, it will create a gold producer that
has the potential to top Barrick’s billion market cap. The deal follows the
billion-dollar mega-merger between Newmont and Goldcorp, which has become the
world’s biggest gold producer on output alone. In his Kitco Commentaries
article, mining sector investor David Erfle said
these deals will bring more investors in—for
a public market that has massive market caps and high risks of becoming
irrelevant, these small movements can create a big impact in the future. The
market’s reactions to these mergers have been generally positive, too even if
the gold and mining industries have been criticised in the past for making bad
decisions. This is evident in the consistent rise of gold’s performance based
on the gold trading
chart on FXCM, from an extreme
low August last year to a favourable increase by the end of January this
year.
But what does it mean for gold traders in other
parts of the world? In South Africa, miners are struggling with a gold mining
industry that is on its knees. Its primary mine, Mponeng cut costs along with
other South African peer groups. This is far from the situation 20 years ago
when Anglo American created AngloGold, the world’s number one gold miner. Now,
even after the merger, AngloGold Ashanti has become the third largest
producer—still quite big, but now far from other giants like Newmont-Goldcorp
producing 7.9m ounces and Barrick-Randgold’s 6.6m ounces. Absa’s Shelley Webber told CNBC Africa that the mergers
can cause junior miners to grow bigger
in the future. Webber also said there are a lot of things impacting the industry
currently like more complex reserves happening, higher import costs, and
outdoor factors that impact the mining efficiency.
Webber said it’s
up to the mining companies to manage these factors,
especially when it comes to managing efficiencies like the costs of
productions, labour negotiations, electricity costs, and new mining rules. But
one of the most pressing issues Webber said need to be dealt with is the rate
the inflation is going—the more expensive everything gets, the more negatively
it will impact not only the price of gold but the rest of the industry as well.
