McKinsey: Gold industry M&A trends poised to accelerate
The gold industry may have faced challenges when looking to build value for shareholders over the past decade, but its performance has started to improve in recent years. High gold prices in 2020, amid the general uncertainty triggered by the global pandemic, pushed the industry to new heights as attention from investors grew. Helped by low interest rates, gold companies can expect to realise unprecedented cash flows.
A new Mckinsey report, advises that the industry need to be mindful of mistakes made during the previous gold price boom, when growth was chased unidirectionally by several companies.
The resulting underperformance left many companies urgently focusing on operating-expenditure reduction, capital-expenditure rationalization, and balance-sheet clean-up. Acquisition premiums, uncertainty over commodity prices, and shareholder and activist–investor scrutiny will also warrant caution.
Buoyed by strengthened gold prices, the industry has performed well on most economic key performance indicators (KPIs):
- Returns to shareholders: The industry generated a TRS (Total Returns to Shareholders) of approximately 33% in 2020 as of December 15, delivering one of the leading returns. For reference, the MSCI world market delivered 12% returns over the same period.
- Fundamental performance: Both the top and bottom lines improved in 2020 for the majority of gold companies. Revenue for the next 12 months is expected to be even higher relative to that of the previous 12 months. Similarly, margin is also expected to improve significantly over the next year. This improvement outperforms both mining and other broader sectors.
- Balance-sheet health: Gold companies improved on leverage ratios in 2020. With an expected increase in performance, leverage ratios are expected to further decrease significantly, providing a much healthier balance sheet in the near future. Leverage ratios for the gold industry are expected to be significantly better than most other mining industries.
McKinsey recommends a range of imperatives that all gold companies should consider embedding in their strategies to learn lessons from the past and ensure that inorganic growth creates value in the current cycle.
The gold industry needs to understand why it underperformed in the last decade, examine how and why tides turned in 2020, prepare for high disposable cashflow, manage high industry fragmentation and appreciate the indicators for declining growth options.
To manage expectation, and to make sure the mistakes of the last boom are not repeated, McKinsey advises five key lessons for gold companies to consider incorporating into their M&A strategies:
- Exercise rigorous validation of premiums (if at all) paid
- Focus on robust ROIC while chasing aggressive growth
- Adopt a clear M&A theme with defined synergies and optionalities.
- Structure beyond pure M&A
- Communicate (and deliver) to capital markets
Vale invests $150mn to extend life of Manitoba operations
Vale has announced a $150mn CAD investment to extend current mining activities in Thompson, Manitoba by 10 years while aggressive exploration drilling of known orebodies holds the promise of mining well past 2040.
Global energy transition is boosting the market for nickel
The Thompson Mine Expansion is a two-phase project. The announcement represents Phase 1 and includes critical infrastructure such as new ventilation raises and fans, increased backfill capacity and additional power distribution. The changes are forecast to improve current production by 30%.
“This is the largest single investment we have made in our Thompson operations in the past two decades,” said Mark Travers, Executive Vice-President for Base Metals with Vale. “It is significant news for our employees, for the Thompson community and for the Province of Manitoba.
“The global movement to electric vehicles, renewable energies and carbon reduction has shone a welcome spotlight on nickel – positioning the metal we mine as a key contributor to a greener future and boosting world demand. We are proud that Thompson can be part of that future and part of the low carbon solution.”
Vale continues drilling program at Manitoba
Coupled with today’s announcement, Vale is continuing an extensive drilling program to further define known orebodies and search for new mineralization.
“This $150mn investment is just one part of our ambitious Thompson turnaround story. It is an indicator of our confidence in a long future for the Thompson operations,” added Dino Otranto, Chief Operating Officer for Vale’s North Atlantic Base Metals operations.
“Active collaboration between our design team, technical services, USW Local 6166, and our entire Thompson workforce has delivered a safe, efficient and fit-for-purpose plan that will enable us to extract the Thompson nickel resources for many years to come.”
The Thompson orebody was first discovered in 1956 by Vale (then known as Inco) following the adoption of new exploration technology and the largest exploration program to-date in the company’s history. Mining of the Thompson orebody began in 1961.
“We see the lighting of a path forward to a sustainable and prosperous future for Vale Base Metals in Manitoba,” said Gary Annett, General Manager of Vale’s Manitoba Operations.