The gold mining industry has been in a steady state of consolidation for the past couple of decades. But according to HSBC Securities analysts Victor Flores and Lucia Marquez, this is not necessarily a good thing.
They argued that all the M&A activity in the sector over the last decade has created "only minimal value." In fact, they found a "strong inverse correlation" between deal activity and share price returns. Put another way, the companies that did less M&A have generally performed better.
"The potential value creation from most acquisitions has been eaten up by the purchase premium, leaving the acquirer to count on a rising gold price or the conversion of resources to reserves to achieve a return," they wrote.
They wrote that the all-in cost of takeovers (including operating and capital costs) has, on average, exceeded the gold price. That breaks a common rule of thumb that the cost of an acquisition (per recoverable ounce) should be less than 75% of the gold price in order to generate a double-digit return. It also implies minimal return on a deal.
Gold equities have badly underperformed the gold price over the last decade, disappointing investors. Mr. Flores and Ms. Marquez think that overpriced acquisitions "largely explain" this phenomenon.
