“Investment Thesis: We believe a new gold mining mergers and acquisitions (M&A) cycle has been ignited, and we expect this merger boom to accelerate over the next several years. The tepid gold price environment since 2011 has forced many gold producers to decrease their focus on exploration and this has caused a significant drop in new discoveries, at a time when global gold reserves are being depleted (see Figure 1).
The challenging environment is forcing miners to strategically combine to reduce expenses and improve their operations. We expect these mergers will create a cascading effect in the industry as the combined entities shed non-core assets and prompt other companies to rethink their strategic priorities. Within the sector, we also see meaningful gradations of valuation between larger- and small-cap companies which could further fuel the cycle.
Our new investment strategy, Sprott Hathaway Special Situations Strategy, pays attention to many likely takeover targets and we believe it has the potential to produce positive returns even in the absence of rising gold prices.
Figure 1: Gold Production is Declining (2015-2025e)
Source: BMO Capital Markets…”