The increase in the price of gold has boosted the value of mining companies, making them attractive to merger and acquisition (M&A) activity over the next 12 months, according to an Australian boutique investment manager.
Maple-Brown Abbott Australian Small Companies Fund co-portfolio manager Phillip Hudak said good investment opportunities are opening up in some gold companies driven by central banks moving back into the asset class.
“The gold price has done very well over the past two years, despite rising real bond yields, which are normally not good for gold. However, the impact of bond yields has been offset by high levels of central bank buying and we see value emerging for gold producers,” Hudak said.
“Those companies that are producing gold right now and can take advantage of the ‘scarcity value’ have outperformed the gold price. Combined with easing cost inflation, profits have been boosted.
“This contrasts to gold developers, which have underperformed the gold price, as they are seeing higher funding costs, project cost blowouts and delays,” he said, noting the US dollar gold price was currently trading at a near all-time high of US$2500 per ounce after rising more than 20 per cent in the year to date.
“We believe there is still significant upside in select gold companies, especially those companies that are increasing their resource base and have low-cost options to bring gold production on, as well as those developers that have high-quality well-funded projects.”
The increase in the gold price would also drive more M&A action into 2025 as limited exploration activity and longer processes to permit the opening of new mines led gold producers to favour a ‘buy over build’ strategy for future growth, he said.
“Gold sector M&A activity is heating up for both global and local small-cap gold miners. It is now becoming cheaper to buy gold miners rather than build gold mines,” he said.
“We’ve seen Newmont and Newcrest get together, Goldfields has been active and that has flowed through to Australian small-cap gold companies, including Ramelius taking a stake in Spartan, Perseus taking a stake in Predictive Discoveries and Red 5 and Silverlake Resources merging.
“We believe this M&A activity will continue, particularly at the smaller end of the market.”
''