Blockbuster mergers might look effective, but not so much from a long-term, big-picture point of view
The Barrick Gold-Randgold merger made headlines last year for creating the world’s largest gold miner. But after a Monday announcement from Newmont Mining that it has agreed to acquire its Canadian rival Goldcorp, there will be a new entity dominating the industry. After years of disappointment, gold bugs may finally have something to be excited about again.
Creating bigger companies with more market power makes sense, especially in a fragmented industry. That’s not to mention rebounding US inflation, which is usually a lifting force for gold prices.
But it’s not that simple, especially when you consider the longer term. “Demand [for gold companies] is stagnant,” said Wall Street Journal contributor Nathaniel Taplin. “And rising competition from new inflation hedges such as cryptocurrencies—the current selloff notwithstanding—could prove a structural headwind.”
Taplin acknowledged that core inflation is likely to go higher this year; it has historically lagged private earnings growth, which has been hovering at roughly 3% for months. But gold prices are down by around a third from their near-US$1,300 per troy ounce peak, while the costs of mining the metal have been rising unabated as it gets harder to find and unearth.
“Barrick’s operating margins, which were nearly 50% in mid-2012 according to FactSet, were barely half that in late 2018,” Taplin said, adding that other miners have also seen large declines. Based on data from Wind, demand from China and India, the two hungriest consumers of gold, has plateaued since 2013; European and US demand has been nearly flat for years.
Industry consolidation is one way for companies to boost margins sustainably, but that’s a long way off even with the latest gold-firm tie-ups. Figures from the World Gold Council indicate that Newmont and Goldcorp together produced less than one tenth of global production in 2017; in contrast, only three companies in the iron ore industry control around 60% of the seaborne market. And while larger gold companies may squeeze out added operational efficiencies, “they are unlikely to help much with pricing power.”
“Newmont’s shares plunged 9% Monday,” Taplin said, noting that investors did not appreciate the 17% premium relative to Goldcorp’s 20-day volume weighted average share price that Newport agreed to pay for its rival firm. “That might be a buying opportunity in the short run if U.S. inflation keeps creeping higher. Longer run, gold shares still don’t look like a good bet.”