What two mega mining deals reflect in gold sector

Two mega deals in less than four months have heralded the much talked about consolidation in the global gold sector which has been speculated about for the past couple of years, according to Craig Brewer, co-head of Banking Africa at Absa Corporate and Investment Banking (CIB).  

First to be announced was the $6.5bn deal announced in September 2018 between Barrick and Randgold; and the most recent is the $10bn mega merger between Newmount and Goldcorp, which will create the world's biggest gold producer by output.

He says that, while this deal could be positive for the gold industry, it will create material uncertainty for the remaining larger producers as to who is next to be acquired or needs to merge.

Gold companies have over the last ten years or so been focused on earnings and cash dividends over exploration. Current mining rates of existing resources causes' net depletion and therefore a motivator for these mega mergers is needing to add projects to boost production profiles and simultaneously obtaining geographic diversity particularly from higher risk regions.

He says the question is whether AngloGold will dispose of its remaining South African mine and go hunting abroad and complete the final leg of its internationalisation process.

In Brewer's view, consolidation in the gold sector in South Africa may still occur although the backdrop is less certain. In fact, he predicts a possible de-consolidation in South Africa with the major South African gold producers offloading assets to the second tier miners and then focus on acquiring offshore.

The overriding caution is that costs will not come down in South African gold sector, which will make any M&A difficult at current prices but not insurmountable.

Renewable energy

Mining companies' interest in renewable energy and captive power supply from Independent Power Producers (IPPs) is rising on the back of concerns relating to the availability, cost, quality and reliability of electricity supplied by national utilities.

The pace of investment in renewable energy is expected to accelerate in the coming years as a result of a significant drop in renewable energy prices, says Theuns Ehlers, head: resource and project finance at Absa CIB.  

South Africa is currently leading the region in renewable energy following the signing of the agreements for the 27 projects procured under the Renewable Energy Independent Power Producer Procurement Programme (REIPPP).

This represents an investment of about R56bn to produce approximately 2 300 MW of generation capacity to be added to the national grid over the next five years.

Outlook

The outlook for the mining sector in South Africa for 2019 remains fairly bullish despite concerns about labour and power costs. There is also cautious optimism of strong commodity prices, according to Shirley Webber, coverage head natural resources at Absa CIB.

She says producers are facing more complex reserves, with higher input costs putting pressure on operating margins. Webber says the cost of power is a concern for mining companies as annual tariff increases are having a negative impact on the cost of production, particularly at high energy consuming miners.

She believes that Eskom’s proposed turnaround plan will be crucial for the success of miners. However, miners are seeking alternative sources of energy in order to remain sustainable.

"Appropriate risk management strategies to weather currency and price volatilities are crucial during these times. Apart from the usual commercial bank or project finance funding, many miners are also considering other sources of liquidity for current expansions or new projects such as streaming structured facilities, asset-based finance facilities and accessing the debt capital markets," says Webber.  

On the regulatory front, Webber says there have been some positive sentiments following the finalisation of the 2018 Mining Charter. The notable feature of the charter is the once empowered always empowered ownership element and the drive for inclusive procurement, as well as supplier and enterprise development elements.

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