Gold miners put their money where their mouths are

Year to date, there have been 429 acquisitions of gold companies worth approximately $12.5 billion and YTD volumes and values are 18% and 13% higher than the first nine months of 2010. Activity levels and the money involved are also already at annual 2009 levels and have surpassed the totals for 2006, 2007 and 2008. That is despite the fact that 2007 was an all-time M&A peak in the broader market.

Nyholt said gold deals also did not “grind to a halt” between June and August as was observed in other mining sectors: “While volumes were off in July, we did not see a drop off in aggregate deal values. In fact, August 2011 outpaced the two months prior by measures of value due.”

What makes this trend especially noteworthy according to Nyholt is the fact that June saw the largest gold transaction of the year – Vallar’s $2.1 billion acquisition of Bumi.

Nyholt said the “troika” still dominates activity in the gold sector. Despite claims that South America, China, India and others are encroaching upon the gold M&A market, players headquartered in Canada, Australia and the US continue to dominate deal-making in the gold sector accounting for just under 80% of buyers and 73% of targets.

In terms of volume of deals, South Americans have been relatively inactive this year – not even registering on percentage terms – and only 3% of buyers were based in China. “However,” says Nyholt, “it interesting to note that four China-based buyers were among the top ten buyers in the gold sector this year. It is a trend that PwC is watching closely.”

The report also notes that some of the most notable deals of the year involved assets in so-called frontier regions: Bumi (Indonesia, West Africa), Century Mining (Peru), Gold One (South Africa) and Kansai Mining (Kenya and Venezuela).

The question is whether deals are being overvalued because premiums continue to rise: After slumping to the level of high teens at the height of the 2008 banking crisis, in 2011 acquirers have been willing to pay a premium of more than 50% on the value of the shares of a target during the prior month.

What puts this in perspective is the wide gap that still exists between bullion and the stock values of the major gold miners. Compared to the price of gold which has rocketed 154% since 2007, the performance of the HUI Index (NYSE:HUI), a weighted basket of unhedged gold stocks, has lagged considerably.