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Gold Fields/mining M&A: right deal at wrong price points to gold rebound

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Gold Fields chair Yunus Suleman has deep regrets that the South African miner gave up its pursuit of Yamana Gold last month. Outgoing chief executive Chris Griffiths must feel even worse; the failed $5.3bn bid for the equity of the Canadian group cost him his job. Powerful investors saw the offer as ill-judged. On Tuesday, Griffiths resigned.

He may not remain unemployed for long. Gold is well placed for a recovery. The pace of inflation is expected to moderate next year towards mid-single digits. When real bond yields drop, gold tends to rise. Experienced executives should be in demand.

Griffiths overestimated the risk appetite of shareholders. The all-stock deal would have diluted earnings per share by over a fifth this year and next according to BMO Capital Markets. Shareholders thought this was a pricey means to offset Gold Field’s faltering production growth from 2025.

Canadians Agnico Eagle and Pan American eventually won Yamana with a $4.8bn joint bid in cash and shares

Gold prices suggest that the bidding partners timed their swoop well. After peaking at just over $2,000 per ounce in early March, not long after Russia invaded Ukraine, the yellow metal sank about a quarter. This happened despite a lot of hand wringing over inflation, especially in the US. Gold has a reputation for acting as a hedge for surging prices.

Not this time. The US Federal Reserve’s hawkishness on rates deterred gold bugs.

But with costs including financing for mining the shiny stuff at around $1,600 this year, gold may be near a turning point. After totting up overheads, investments and even dividends, the average gold miner could need a price as high as $1,800 an ounce to cover all its needs, thinks Raj Ray at BMO. That is the current market price. A premium is needed to incentivise exploration.

One way gold companies can expand output cheaply would be through takeovers more affordable than the deal Griffiths advocated. But ultimately the price of the metal itself will need to rise.

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