Over the last 10 years, the price of gold has returned more than 15% annually in terms of the U.S. dollar. However, shares in companies that produce the precious metal have found it hard to keep pace with the value of the commodity.
Newmont Corporation (NYSE: NEM) (TSX: NGT) and Barrick Gold, two of the biggest miners of gold globally, have returned about 4.6% and -5.1% per year respectively over the last decade. These figures are inclusive of dividends. An equally weighted basket of stocks from both firms would have returned -0.2% per year.
Over the last few decades, the mining sector has been constrained by poor decisions on capital allocation, which have led to poor investor returns, decreased efficiency and higher costs.
It now seems that managers may have understood the issues that have affected the industry for a while now. This comes as miners look for deals to boost profitability and growth. Over the last five years, the price of gold has risen by more than 40%. Miners of gold are focused on capitalizing on this growth with good deals.
One noteworthy deal was the merger between Newmont and Barrick’s operations in the state of Nevada, which occurred in 2019. That year, these two major players of the industry merged their operations to establish Nevada Gold Mines, which is the biggest gold mining complex globally.
Through the acquisition of new assets, miners can exploit the failings of the market, which is easier than developing new assets. In 2021, the volume of mergers and acquisitions increased significantly, with Kirkland Lake Gold and Agnico Eagle Mines merging at a value of $10.5 billion.
Kinross Gold also acquired Great Bear Resources for $1.4 billion while Newcrest forked out $2.8 billion for Pretium Resource. The value of these mergers surpassed $15 billion.
Yamana Gold may soon follow suit, as Gold Fields recently agreed to pay more than $6 billion to acquire the firm. However, even with the lucrative deals in the mining sector, gold’s mining industry is still in fragments. The precious metal’s stable price is allowing miners to strengthen their financial positions and offset increasing costs while also strengthening their balance sheets.
The increasing demand for gold is also supporting deals and growth in the sector, which may allow investors to capitalize on this trend by moving into gold miners. Additionally, increasing the sector’s exposure may help decrease risk, even as the global economy’s outlook becomes more uncertain as the days go by.
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