The much-anticipated wave of gold sector consolidation is finally gathering momentum. While some notable deals, such as Newmont’s $19 billion bid for Newcrest last year, have made headlines, mergers and acquisitions in the gold space have been relatively sporadic. However, AngloGold Ashanti’s recent £1.9 billion bid for UK-listed Centamin signals that pressure for consolidation is mounting.
AngloGold, a US-listed mining giant, is leveraging its impressive stock performance to strike a favourable deal. As of Monday’s close, AngloGold’s shares had surged nearly 60% this year, while Centamin’s shares had risen by just 20%. This disparity allows AngloGold to offer a substantial 37% premium while still valuing Centamin at a modest 3.9 times its expected earnings before interest, taxes, depreciation, and amortisation (EBITDA) for the year, according to Morgan Stanley estimates. In comparison, AngloGold trades at 4.5 times its own EBITDA. Although specific synergies have yet to be fully detailed, the deal is expected to bring savings in areas like procurement and head office expenses. Additionally, AngloGold’s larger balance sheet and operational expertise could unlock further potential from Centamin’s flagship asset, the low-cost Sukari gold mine in Egypt.
Investors should brace for more opportunistic bids like this. The gold sector is highly fragmented, with numerous companies boasting market caps exceeding $1 billion. At the same time, years of under-investment in exploration have created a scarcity of new projects, prompting miners to look towards acquiring each other’s assets and resources.
Valuation gaps across the sector are further fueling deal activity. AngloGold is a prime example of a major player benefiting from these disparities. While overall performance in the mining industry has been lacklustre compared to gold’s strong rally, larger mining companies have generally outperformed their smaller counterparts. For instance, the GDX index, which tracks gold and silver miners, has climbed 34% over the past five years, double the performance of the GDXJ index, which focuses on smaller miners. This reflects a broader trend of mid-cap miners struggling to attract investor capital compared to their larger peers.
The ongoing bull market in gold could accelerate consolidation. With growing unease in US equity markets, more capital is likely to flow into the gold sector. Larger mining companies, with their greater market presence and broader analyst coverage, are well-positioned to attract a larger share of this inflow compared to smaller, higher-risk operators. At gold prices of $2,500 per ounce, producing companies, with average all-in cash costs of around $1,950 per ounce according to BMO’s Raj Ray, are now also able to deliver attractive yields to investors.
As these larger miners regain favour, they will be well-placed to sift through the sector for valuable acquisition opportunities.