Forget Buffett’s Gold Move. What’s Next?

Written by Adam English
Posted August 20, 2020

Warren Buffett’s big move into gold certainly sent shockwaves across the sector.

Rightfully so, not only because the roughly half-billion-dollar deal came alongside Berkshire Hathaway dumping bank stocks, but because of Buffett’s well-documented disdain for gold as an investment.

I can’t blame him for wanting exposure to a major gold miner like Barrick Gold though. Money is money, and while gold might not generate a return, owning a large stake of a company that is pulling it out of the ground is getting increasingly profitable with gold hovering around the $2,000-per-ounce level.

But that deal is done, at least as far as we’re concerned. I want to look at what else is going on.

I want exposure to what people aren't talking about yet. From the look of industry trends, I think we can get a good idea of what it’ll look like.

Gold miner M&A has languished for years. Sinking prices, lack of investor appetite, and high debt burdens for major miners have all contributed to that.

Starting last year though, we saw that come to a dramatic end.

2019 started with a bang, with a $10 billion deal between Newmont Mining and Goldcorp.

That kicked off a flurry of pending deals, like the $3.68 billion offer by Kirkland Lake to acquire Detour Gold, the Endeavor-Centamin $1.9 billion deal, and the Zijin Mining Group-Continental Gold $1 billion deal.

Then came a slew of smaller ones, Equinox Gold and Leagold Mining, St. Barbara and Atlantic Gold, Resolute Mining and Toro Gold, Osisko Gold Royalties and Barkerville Gold Mines, and Northern Star Resources and Echo Resources.

All in all, more than a dozen deals were proposed or went through, with eight of those coming in Q4 2019 alone.

Then came the virus and a drop in activity. This should surprise no one considering the whole world took a step back to assess the chaos.

Since then though, gold prices have soared, best practices were established, and companies are back on the prowl.

Most importantly, free cash flow at gold miners from the increase in gold prices hasn’t looked this strong going forward for over a decade.

The timing couldn’t be better considering the drop off in productivity or higher costs that major miners face in years to come.

It takes well over a decade for a project to go from discovery to full production, along with a whole lot of capital.

Quite simply, that hasn’t been happening at all. Both investment and the total size of discoveries look dangerously anemic.

Gold producers desperately need to secure partial or full stakes in projects with large reserves and low all-in sustaining costs.

The alternative is to face dwindling reserves of their own and spiraling costs that put them at a severe disadvantage to their peers for years or decades to come.

May saw a flurry of deals with an emphasis on land package consolidation and efficiency being proposed. That is a strong sign that insiders are bundling sales packages that are far more attractive to major miners.

Industry insiders are expecting a second half of the year unlike anything we’ve seen.

Yes, Buffett’s Barrick Gold deal is, well, a big deal. But we shouldn’t dwell on that. We should look forward.

All the signs point to major deals and a flurry of activity in exploration plays, junior miners, and smaller companies.

That means some of the least known names are poised to outperform, and we’ll be well-positioned to outperform the broader gold market and stock market with them.

Take care,

adam english sig

Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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