Riding a wave of mergers among gold producers
Despite challenging market conditions for gold, Fidelity’s Steve Calhoun sees opportunities to get ahead of the next upcycle for the precious metal.
Although gold-mining companies had a challenging 2022 due to rapidly rising interest rates and a strong dollar, there are compelling opportunities in the industry given increased corporate consolidation, says Fidelity’s Steve Calhoun.
“There has been a tremendous amount of M&A in the industry the past few years,” says Calhoun, portfolio manager of Fidelity® Select Gold Portfolio (FSAGX). “Companies realize that mining assets in the world are finite, and many are looking to align with other firms to become a better business and create shareholder value.”
One area where gold production has been fertile, and where some companies recently have merged or acquired assets, is the Red Lake District in Ontario, Canada. We owned sizable stakes in two of the big gold-mining firms that operate in the region, Barrick Gold (GOLD) and Kinross Gold (KGC), as of November 30.
In February, Kinross completed its acquisition of Great Bear Resources, obtaining its flagship Red Lake project.
“Coming into this recent period of difficulty, many gold companies did a good job improving their financial stability by reducing debt and boosting cash flow,” he says, adding that he believed the industry was in the best shape it’s ever been coming into a down cycle for gold.
Elsewhere, Kirkland Lake Gold completed its merger with Agnico Eagle Mines (AEM) last February. More recently, Canadian-based Yamana agreed to be acquired by both Agnico and Pan American Silver, ending Yamana’s deal with South Africa’s Gold Fields that was reached this spring. Agnico was the fund’s third-largest holding at the end of November.
“This deal for Yamana is a win-win for everyone involved,” says Calhoun. “Agnico will acquire its Canadian assets, while Pan American will take its South American assets, adding to its current presence there. Agnico also will pick up Yamana’s 50% share of Canada’s largest mine, the Canadian Malarctic. Even Gold Fields gets some benefit: a $300 million break fee.”
Another area that has seen recent consolidation and could see more is the Golden Triangle region of northwest British Columbia, says Calhoun. In 2021, Newcrest Mining (NCMGY) announced an agreement to acquire Pretium Resources, which operates the high-grade Brucejack mine in the region.
“I believe this consolidation is likely to continue in coming years, given the competitive nature of the industry and existing corporate fundamentals,” says Calhoun. “And as I am visiting companies and talking to management, I’m paying close attention to what some of them need to do to improve their businesses and making investment decisions accordingly.”
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