Newmont, Newcrest and the reasons to be upbeat on gold miners

© Reuters Newmont, Newcrest and the reasons to be upbeat on gold miners

Proactive Investors - There are 40bn reasons to upbeat about the prospects for the gold sector.

In dollar terms, the number above is the value of merger and acquisition activity seen so far this year in the sector.

But just what’s behind it and why has the price of the yellow metal been so erratic since the start of the year?

Here Proactive takes a closer look at the sector and takes a deeper dig to see what lies in store for UK gold miners.

Setting the scene

The gold market has been far from steady in the first few months of the year, despite a 7.2% increase in the price of the precious metal since January.

Beginning the year at US$1,824 per ounce, its value steadily rose throughout January, reaching a high of US$1,953 per ounce early the next month.

However, it then fell to a low of US$1,811 per ounce by the end of February, before strengthening and rising to its current level of US$1,955 per ounce in March.

Of course, the price briefly nudged above US$2,000 as the turmoil in the banking sector looked set to explode into full-blown contagion.

Before this, volatility was driven by unexpectedly strong US economic data in February, which temporarily weakened the gold price as the dollar strengthened.

However, the retreat was short-lived, and the prospect of additional rate hikes caused the gold price to rise once again.

Strategic buying

The dynamics of the market have also been shaped by a surge in strategic players buying gold and gold assets.

National governments and some of the world's biggest mining companies have recognized that current economic conditions are likely to drive the value of gold and gold assets higher.

In 2022, central banks purchased a net of gold for the thirteenth consecutive year, with the highest level of annual gold demand from central banks on record.

Additionally, China reported an increase in their gold reserves for the third month in a row in February, and the Central Bank of Croatia bought almost two tonnes of gold in December, the first time in 20 years the bank has done so.

M&A activity on the up

Amidst this governmental buying of gold, there has also been a significant number of gold miners being acquired by rivals.

For instance, Newmont Corporation of Canada Ltd, the world's biggest gold miner, made a US$17bn offer for rival Newcrest Mining Limited (ASX:NCM).

Canada's Agnico Eagle Mines and Pan American Silver Corp are buying Yamana Gold for US$4.8bn, while Agnico Eagle Mines is spending US$10.4bn to acquire Kirkland Lake Gold.

BHP Limited, meanwhile, is also acquiring OZ Minerals for US$6.4bn, and B2Gold Corp. (TSX:BTO) is acquiring Sabina Gold & Silver Corp. for US$800mln.

Finally, former Goldcorp chief Rob McEwen has acquired a 37.6% stake in junior gold explorer, Satori Resources.

Buying set to continue

With nearly US$40bn of transactions already, it is unlikely to stop there, as numerous analysts and commentators expect more gold mergers and acquisitions this year.

As yields on bonds decrease and interest rates rise, the gold price is also likely to rise, as the dollar purchasing power and consumer standard of living decrease.

We can expect continued uncertainty in global financial markets during 2023, which can only support a positive trajectory in the gold price.

Given this positive backdrop, several gold companies may be worth a closer look, as they may represent interesting targets for larger rivals to acquire or are positioned to benefit from an uptick in investor interest in the gold sector.

Four to watch?

Shanta Gold Limited has caught the attention of three potential buyers, including Chaarat Gold, a UK-listed company. Shanta Gold 's plan is to increase production in Tanzania at the New Luika Gold Mine and to deliver its first gold pour at Singida, with the ultimate goal of reaching an annual production of 100,000 ounces.

Meanwhile, Caledonia Mining Corporation of Canada Ltd has announced a successful £10.5 million fundraiser, which will enable it to accelerate its work programme in Zimbabwe. The company anticipates unearthing up to 97,500 ounces this year from its Blanket and Bilboes operations in the country. Caledonia's ability to generate healthy quarterly dividends indicates that it remains a lucrative cash generator for investors.

Another player worth watching is Greatland Gold PLC (LON:GGPL), which has a 30% stake in the Havieron copper-gold project in the Paterson region of Western Australia. Newcrest holds the remaining stake and is developing the deposit, which boasts a potential of 6.5 million gold equivalent ounces, positioning it as a world-class property. However, the future of Havieron, and consequently, Greatland, may hinge partly on the outcome of Newcrest's potential takeover by Newmont.

Finally, Ariana Resources PLC has proved that good things sometimes come in small packages. The company's Kiziltepe Mine in Turkey produced record-high gold ounces in 2022 (28,421) and revenue (US$58 million), marking the sixth consecutive year of output exceeding guidance. While 2023 may not match the previous year's performance, the recent 26% decline in Ariana Resources ' share price appears unwarranted.

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