Underinvestment forces gold mining sector consolidation
The guest argued that gold mining companies will be forced into a wave of mergers and acquisitions to combat declining output caused by years of underinvestment in exploration.
The argument
Rule explained that shareholder pressure for dividends and buybacks led to underinvestment in new project development. To sustain production levels, major producers will have to acquire smaller, single-asset, or junior mining companies, which will lower their cost of capital and attract index/ETF buying.
The thesis, stress-tested
✓ What validates it
- ✓An increase in corporate M&A activity and joint ventures in the gold sector
- ✓Major producers reporting declining organic reserve replacement in quarterly filings
▸ Risks discussed
- ▸Acquirers overpaying for low-quality assets
- ▸A sharp decline in the gold price making acquisitions uneconomic
Hear it yourself
"You know? And then the base metals mining companies who produce silver is a byproduct, as example, from copper, where their true cost to produce silver are really a function of separating the silver from the product stream. So the last in terms of efficiency are the silver miners. And if you are if you are active in the least efficient part of the product cycle, you have to be extremely efficient yourself to survive. BHP, as an example, producing silver as a byproduct, could see the silver price fall from $85 an"
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