Gold rush warnings after $14bn mega-deal

There are fears history could be repeating itself after Newmont Mining announced a $US10bn takeover of rival Goldcorp.

Evolution Mining executive chairman Jake Klein. Picture: Hollie Adams

One of the biggest beneficiaries of the last wave of destructive gold acquisitions has warned that history could be repeating itself after US gold giant Newmont Mining reclaimed the crown of the world’s biggest gold producer through a $US10 billion ($13.8bn) takeover of rival Goldcorp.

The latest gold mega-merger, which follows Barrick Gold’s recently completed $US6.5bn union with Randgold, will see the enlarged Newmont produce almost 8 million ounces of gold a year and will make it the only gold producer in the S&P 500 index.

But the head of Evolution Mining, which along with Northern Star Resources engineered a series of bargain acquisitions when the gold majors were forced to sell assets to relieve their debt-laden balance sheets, said he was nervous that the giants could be repeating some of the mistakes of the past.

Evolution Mining executive chairman Jake Klein has previously highlighted the reputational damage suffered by the gold sector as a result of the majors’ last acquisition frenzy, when there was a fixation on adding production.

“The thesis being pitched is bigger is better, and in the past that hasn’t proven to be the case from a shareholders’ perspective,” Mr Klein told The Australian.

“I’m sceptical that this time is different. I’m not convinced that having more operations is necessarily better.”

He noted that it was companies like Evolution and Northern Star, and international producers Agnico Eagle and Randgold, rather than the gold majors that had performed best in recent history.

“They’re all mid-tiers. They deliver smaller production but they’re high-margin and very profitable,” he said.

“If you look at Evolution’s cash flow, there’s terrific cash generation and we’re dividend-paying. I’m not sure why scale makes it more attractive from an investor perspective.”

His Northern Star counterpart Bill Beament told The Australian he did not want to comment specifically on the Newmont-Goldcorp deal, but noted that the market’s current appetite for gold deals did feel like the lead-up to the last large-scale acquisition frenzy.

Mr Beament said it was important for gold companies to focus on quality, rather than scale, and said it was encouraging that both Barrick and Newmont had flagged their intention to sell some assets in the wake of the mergers.

“They’ve mentioned they need to rationalise their portfolios and they do. You don’t want to go back to the days where Barrick had 41 mines,” Mr Beament said.

“Imagine having 41 children: you can’t kiss them all and tuck each of them into bed at night. It’s no different running mines. There’s a threshold of what you can realistically do as a management team.”

Both Barrick and Newmont have flagged their intention to sell assets following the mergers. Newmont said its preferred long-term production level was between 6 and 7 million ounces, which it said would involve between $US1bn and $US1.5bn of divestments in the next two years.

Credit Suisse analyst Michael Slifirski told The Australian the Newmont deal could complicate Barrick’s efforts to sell its half-share of Kalgoorlie’s famous Super Pit. Newmont, which owns the other half, had flagged its interest in buying out Barrick but was now far less likely to act.

Mr Slifirski said the majors were being far more cautious with their acquisitions this time, which was reflected in the modest margins offered in each transaction.

“Last time it was about scale for relevance. This time it’s also about scale for relevance, but there’s a far greater focus on also avoiding value destruction.”