Newmont Mining is coming in hot.
The world’s largest gold company announced a massive $17 billion takeover bid on Monday to acquire Newcrest Mining, Australia's largest gold miner.
It’s a big deal. If the bid is accepted, the merger will send reverberations across the global gold mining landscape.
The deal would create a monster of a gold mining company, putting Newmont’s market cap at almost double its next-largest competitor, Barrick. It would also represent the largest mining merger in years.
Mergers and acquisitions among gold mining companies began to significantly increase starting in 2018 when Barrick acquired Randgold Resources for $18 billion.
Then in 2021, another big merger was announced between Agnico Eagle Mines and Kirkland Lake Gold valued at almost $11 billion.
Several smaller deals have also been announced since then, including Kinross Gold’s $1.4 billion buyout of Great Bear Resources, Newcrest’s $2.8 billion takeover of Pretium Resources, and, more recently, a $4.8 billion acquisition of Yamana Gold by Pan American Silver and Agnico Eagle.
Gold mining M&A is, of course, nothing new. Gold mining companies like Newmont need to continually replace diminished reserves, and Newmont has a decades-long history of acquiring and integrating smaller mining firms. I’d bet Newmont's CEO couldn’t tell you how many M&A deals the company has been involved with throughout its entire history.
Nevertheless, the recent increase in gold mining mergers is a bit of a concern for the industry. That’s because it's evidence of a growing problem the gold mining sector has been dealing with for pretty much all of history — and that’s declining ore grade.
Starting from as far back as I can possibly find, the average ore grades from gold mines worldwide has been on a slow general decline.
Now, there are multiple reasons for the decline of gold ore grade, but the main reason is necessity.
When we talk about gold mining, ore grade is simply the amount of gold contained with a rock.
The more gold contained within your ore, the more profitable it is to mine.
After thousands of years of mining, much of the world’s high-grade gold deposits have been mined out — the lowest-hanging fruit was harvested first, and most of the world’s large commercial gold operations today are very low grade.
For the most part, gold ore grade is measured in grams per tonne (g/t).
Gold ore grade that assays 30 grams per tonne simply means there are about 30 grams of gold for every tonne of rock. (FYI, the metric system is standard in the mining industry, so I’m talking about a metric ton, or 2,204 pounds.)
Different types of rocks have different densities and different weights, but you can generally imagine a tonne of rock is about the size of a 55-gallon oil drum.
A gold ore grade that assays 30 grams per tonne doesn’t actually have that much gold in it to begin with. You have to dig out an oil drum's worth of rock just to get about an ounce of gold. But if gold were very common, it wouldn’t have as much value.
Today, commercial gold mines that operate with an average ore grade of 30 g/t are extremely rare. In fact, there’s only one major mine in the world I can think of that produces gold from such high ore grades, and that’s the Fosterville Mine in Australia, now owned by Agnico Eagle after an acquisition in 2021.
The average ore grade from gold mining operations around the world today is about 1.35 g/t.
And ore grades are only expected to continue falling.
As ore grades decline, mining for gold will become more and more expensive. According to the latest data from the World Gold Council, the all-in sustaining cost (AISC) for mine production of an ounce of gold in the first nine months of 2022 was at its highest ever — $1,289 an ounce.
Declining gold ore grades are among several factors that will help drive gold prices higher in the coming years, but they also present an opportunity for investors.
Newcrest shares closed up 9.3% on Monday. The market seemed to think Newmont’s offer was a bit too high, as its share fell about 5%. But for Newcrest shareholders, Monday was a payday.
Over the coming weeks, I’ll be looking into several midtier gold mining companies that may also be buyout targets for companies like Newmont, and I’ll come back to you with my favorites.
Stayed tuned.
