Price volatility means gold is belying its reputation as a haven asset. That has not fazed miners such as Gold Fields, which want to replace dwindling reserves. The South African group has agreed to buy Canada’s Yamana for about $6.7bn in an all-share deal.
Price gyrations make value hard to assess, so Gold Fields is sticking its neck out. Russia’s invasion of Ukraine briefly sent the price of the yellow metal above $2,000 an ounce in March — and near its record high. Prices have since dropped back below $1,900 amid higher Treasury yields and a stronger dollar.
The deal will transform Gold Fields into the world’s fourth largest gold miner, with about 3.4mn ounces of production per year. That puts it behind Newmont, Barrick and Agnico.
Gold Fields is digging deep to make this happen. Its offer represents a 34 per cent premium to Yamana’s closing price on Monday. The deal implies an enterprise value to EBITDA multiple of 7 times for Yamana, above the 5 times Gold Fields itself trades at. Yamana will contribute under a third of the enlarged group’s EBITDA. But its investors will own almost two-fifths of the equity.
The 22 per cent drop in Gold Field’s US-listed shares shows that its own shareholders think it is overpaying. The fall also underscores gloom about gold prices. A strengthening greenback makes gold more expensive for foreign buyers. Higher Treasury yields diminish the appeal of holding yield-less gold.
Pessimism on gold may be overplayed. Despite the recent drop, prices remain well above pre-pandemic levels. It has traded consistently above $1,800 over the past two years. Rising inflationary pressure, the war in Ukraine and recessionary fears should continue to provide support.
The fact that Gold Fields is paying in shares takes some of the sting out of the steep premium. Gold miners have spent the past decade and a half strengthening balance sheets and paying dividends to win back investors. Now bullion prices are historically high, they need to prop up production.