Gold mining equities are scuffling this year, but some industry consolidation could spark the VanEck Vectors Gold Miners ETF (GDX), the oldest and largest exchange traded fund dedicated to gold miners stocks.
On Tuesday, Agnico Eagle Mines and Kirkland Lake Gold agreed to a merger. Heading into the day, Kirkland and Agnico Eagle were GDX’s sixth- and seventh-largest holdings, respectively, combining for over 9% of the ETF’s weight, according to VanEck data.
Though it’s unlikely to alter GDX’s geographic exposure, the Agnico Eagle/Kirkland marriage creates a Canadian gold mining behemoth. That country accounts for 44% of the ETF’s weight, more than double the second-largest country exposure, which is the U.S., at 19.46%.
“Upon closing of the Merger, the Company is expected to have $2.3 billion of available liquidity, a mineral reserve base of 48 million ounces of gold, (969 million tonnes at 1.53 grams per tonne), which has doubled over the last 10 years, and an extensive pipeline of development and exploration projects to drive sustainable, low-risk growth,” according to a statement issued by the companies.
While the news didn’t do much to move GDX yesterday — the ETF fell 1% on a bad day for the broader market — investors may not want to get caught up in near-term price action.
With gold prices still high in historical terms and miners having cleaned up their balance sheets considerably in recent years, some of GDX’s larger components may look to scoop up attractive assets at discounted valuations while share prices are low. The average market capitalization of GDX’s 55 components is $19.5 billion — not too large to scare off potential suitors for the fund’s smaller holdings.
Additionally, there are reasons for buyers to strike while share prices are depressed. Consolidation is an effective way to replace reserves and reduce costs, two of the metrics Wall Street emphasizes in this industry. By coming together, Agnico Eagle and Kirkland appear to be accomplishing those objectives.
“The combination of Agnico Eagle and Kirkland Lake Gold combines each company’s strengths by bringing together two industry leaders in growing per share value in key metrics such as production, mineral reserves, cash flow and net asset value. Both companies also share a strong commitment to returning capital to shareholders, with a total of $1.6 billion being returned through dividend payments and share repurchases since the beginning of 2020 (on a pro forma basis),” according to the statement.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
