DEPRESSED valuations for Johannesburg-listed gold stocks could usher in a fresh period of merger and acquisition activity, according to a report by Nedbank Securities.
“They continue to trade at a large valuation discount relative to their international peers, and the valuations are not reflective of underlying asset quality and operational performance relative to their international peers,” said Arnold van Graan, an analyst for the bank in a report on May 18.
“This M&A potential could, therefore, support South African gold company valuations and may offset some of the potential downside in a gold price downturn, in our view. We believe AngloGold and Gold Fields are the two standout names on this basis,” he said.
In late 2019 and 2020 there was speculation of a possible merger between Sibanye-Stillwater and AngloGold Ashanti and Gold Fields.
“I think there are three high quality South African companies that should be put together,” Neal Froneman, CEO of Sibanye-Stillwater told Business Day at the time, referring to his company, Gold Fields and AngloGold Ashanti. That would be “in the national interest” and would make a lot of commercial sense, he said.
Gold industry merger and acquisition activity last year totalled $21.3bn, the second highest ever in which an estimated 38 million ounces were acquired in 44 deals, according to research by Bank of America.
It added that more M&A was on the cards in the sector this year.
“Can it continue in 2022? It needs to, in our view. companies that don’t replace reserves risk (severe) derating and are likely to be consolidated(on the cheap) in our view,” said the bank’s analyst Michael Jalonen in January.
Cost inflation which could move into double digits for gold producers this year would also contribute towards M&A activity, Jalonen said.
Van Graan said that Johannesburg’s gold stocks had been on a good run but continued Covid-19 infections, infrastructural and safety problems as well as inflation had taken the wind out of their bull run. “(W)e would not buy the South African gold stocks on their M&A potential, but it is worth keeping in mind when one must be invested in gold for downside protection,” he cautioned.