Recent events in the Australian gold sector have shown just how much its approach to equity investors has changed in recent years.
The last 15 years have been a remarkable period for homegrown gold producers. You only have to flick through a 2011 issue of Paydirt sister publication GMJ to be reminded there were less than a dozen gold producers on the ASX at the time, and any gold miner producing more than 150,000 ozpa was generally considered part of the mid-tier.
Apart from Newcrest Mining as the behemoth, it was a modest sector, but one which over the next decade saw the rise of a genuine mid-tier. Led by Northern Star Resources Ltd and Evolution Mining Ltd, the industry took off from 2015, reviving tired and/or closed operations, drilling out new resources and reserves and pulling off a series of corporate transactions which built stronger, more stable companies capable of taking advantage of the ensuing gold bull market.
It was a period defined by sensible growth and growth for profitability, one where profitability and balance sheet strength was not sacrificed for greater production numbers.
It came in direct contrast to the avarice and conspicuous growth of the North American majors in the period immediately preceding it. That era (circa 2008-2013) had seen ambitious M&A moves blow up in the faces of the gold majors and mid-tiers. In striving for larger portfolios, they diluted their shareholders and balance sheets so when the gold run stalled, they had little to show investors for the years of headline-making deals.
The strategy proved correct. Northern Star and Evolution grew beyond $20 billion market caps and there are now more than a dozen Australian gold companies with plus-$4 billion valuations. In the process they have become the darlings of the international mining investment community.
Now, each company presentation includes a slide about the strong institutional make-up of the share register and the presence of big North American funds.
Several of the recent M&A transactions in the domestic gold space are designed to elevate the combined companies into this space. When Regis Resources Ltd made its bid for Vault Minerals Ltd earlier this year, the strategy was steeped in notions about the elevated status of the merged company and how it would attract the attention of these big, North American and European generalist investors.
Ultimately, Genesis Minerals Ltd’s more conventional pitch of operational synergies reigned supreme for Vault but it too talks about the opportunity an enlarged company has to attract generalist investors.
There is obviously merit to this argument. Generalist investors are more interested in gold and gold equities than ever before, but these groups don’t have room for 4-5 such companies in their portfolio. And in an era when SpaceX raised $US86 billion at IPO, even a $5 billion gold miner looks like a junior.
If a company is convinced securing such investors is crucial to long-term prosperity, then such M&A – growth for the sake of growth – makes sense. However, management and shareholders must understand this shift comes with new demands, new expectations and new consequences.
It reminds me of Newcastle United, the English football team with perhaps the most fervent local following.