Newmont Corporation’s $17 billion offer to buy Newcrest Mining of Australia is a continuation of a consolidation trend in the gold sector that started more than two years ago.
There were nearly $1 billion in gold company transactions in 2021 and 2022 after eight years of mostly negative aggregate mergers and acquisition activity.
It’s the size of the Newmont deal that’s important as large scale M&A has preceded prior multi-year bull market runs for gold and related companies.
The last time capital expenditures among gold firms went from chronic underinvestment to steadily higher was around 2002.
Keep reading and have a look at three instructive historical charts to find out why the Newmont deal could be signalling higher gold prices for several years to come and more deals as majors and intermediate producers snap up smaller companies.
This Newmont deal could be mirroring a period about 20 years ago when gold went from being out of favour to a multi-year bull market run that peaked in 2011 at just below $2,000 an ounce.
In the early 2000s, as the gold price moved off its multi-year low of about $250 an ounce, gold corporations looked to capitalize by buying each other up in order to have as many ounces of production and reserves as possible.
That is to say that as the price of gold rises, precious metals companies ramp up their capital expenditures.
Mergers and acquisitions during that cycle peaked in 2011 with more than $10 billion in deals, as seen in this chart courtesy of Hedgeye Risk Management.
A similar scenario could be playing out now.
One of the key differences this time is that gold companies have become far more disciplined in how they spend their money with many paying out dividends and buying back stock instead of spraying cash around on overpriced deals that may not add shareholder value.
In fact, the last four plus years have seen precious metals miners buy back more stock than they’ve issued.
That trend could reverse as, again, as the gold price rises companies increase their capital expenditures on their operations and on striking deals to bolster their gold resources.
Gold has had an impressive run since last November.
Gold bugs would give you myriad reasons for that from the massive amounts of government debt globally to geopolitical unrest, which can make gold attractive as a haven.
But one of the main reasons for gold’s strength recently is that long-term bond yields have been moving lower as the bond market sniffs out slowing economic growth, and decelerating inflation and corporate profits.
History may be rhyming for gold and gold miners and the Newmont deal may be a signpost along the way to more deal activity and higher prices.