Gold: Where has all the deal-making gone?

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Is the gold mining industry well positioned for a big round of mergers and acquisitions? Gold executives would have you believe it, but recent takeover activity within the sector has been awfully quiet compared with recent years, even as the price of gold hovers within 7 per cent of its record high.

A fascinating article from Bloomberg News focused on recent comments from Goldcorp Inc.'s chief executive Chuck Jeannes, who alluded to the cheap valuations among gold explorers as a reason why takeovers might pick up: "The development-company valuations have come down to where, at least on paper, it looks like there's some opportunities," he said. "There's a lot of looking going on."

Among explorers, according to Bloomberg, the average stock now trades at just 1.54-times book value – a key metric of a company's valuation by the market – versus a three-year average of 2.58. For the NYSE Arca Gold Bugs index, which includes large producers like Barrick Gold Corp. and Gold Corp., the average book value is now 1.83, versus an average of 2.53 over the past decade.

Yet, cheap stocks and a high price for gold – and expectations among gold enthusiasts that the price will rise even higher, given moves by the Federal Reserve to stimulate the economy – have had little impact on M&A activity. According to Bloomberg, gold company takeovers worth $200-million (U.S.) or more announced this year have totalled $2.5-billion (U.S.) in value. That's a fraction of the $11.6-billion worth of takeovers announced by this time last year.

And gold takeover deals had totalled a whopping $32-billion in the first seven months of 2010, even with gold trading about $500 below its current level.

"If you have a view that the gold price is strong and is going to go higher, then acquiring more reserves or producing properties today makes sense," Greg Fournier, Merrill Lynch's head of metals and mining investment banking for Asia, told Bloomberg in 2010.

Presumably, it still makes sense – so why have deals slowed so much?

Part of the problem might be the fact that some big deals have gone awry, scarring executives. In 2010, Kinross Gold Corp. (full disclosure: I own this stock) bought Red Back Mining for $7.1-billion, only to write down the asset by $2.9-billion earlier this year after Kinross's share price had fallen some 60 per cent since the deal closed. Tye Burt lost his job as Kinross chief executive this summer – and the Red Back deal was probably the reason.

The other issue is that for all the gains in the price of gold, gold companies have failed to keep up, with higher operating costs often to blame. Over the past decade, the NYSE Arca Gold Bugs index has lagged the price of gold by an astounding 130 percentage points.

Another round of deal making might be just the thing to draw investors back to the gold mining sector. It is one thing for gold bugs to proclaim that gold has nowhere to go but up, and up in a big way. But bullish enthusiasm from mining executives is another matter entirely. And based on recent actions, they've gone awfully quiet.