Mining for Mergers: Which Gold Miners Might be Acquired?

Joung Park,

As gold prices have scaled new heights in recent years, acquisition activity has begun to heat up in the gold mining space. In this article, we will conduct a case study of recent major transactions in the gold mining space to identify characteristics of attractive takeover candidates. We will then apply these lessons to spot likely takeover targets within our coverage universe.

Profile of the Perfect Target
The primary reason a gold miner would acquire one of its peers is to expand its reserve base. As a gold miner depletes its existing reserves by extracting its below-ground ore, the firm must replenish those reserves to ensure continued production. This need is particularly acute for large majors, who typically deplete reserves at prodigious rates. While miners can expand their reserves by using either their shovels or their checkbooks, many prefer to purchase reserves on the market given the significant capital and time requirements, as well as the highly uncertain prospects surrounding exploration.

One of the largest deals in the gold mining space in recent years was initiated by Australian major Newcrest Mining (Other OTC:NCMGY.PK - News), which extended a takeover bid for Lihir Gold (NasdaqGS:LIHR - News) in May 2010, valued at $8.8 billion at the time of the offer. We believe the deal will almost certainly close this fall. There are several reasons why Lihir represented such an attractive takeover target for Newcrest. The firm controls the world-class Lihir Island mine, which houses 31 million ounces of gold reserves. Lihir is also a low-cost producer, ensuring that the combined Newcrest-Lihir entity will remain in the bottom quartile of the industry cost curve. More specifically for Newcrest, most of Lihir's reserves are situated in Papua New Guinea, a country where Newcrest also enjoys a significant mining presence. This close geographic proximity of Lihir's assets undoubtedly increased its appeal to Newcrest, as the firm can leverage its existing infrastructure and experience working in Papua New Guinea to better service the acquired assets. (more)