The gold industry, recovering from the worst slump in prices in 30 years, needs more mergers to help improve investor returns and eliminate unprofitable mines, Fidelity Investments said.
About a third of gold production is probably money-losing when the price of the metal is lower than $1,250 an ounce, said Joe Wickwire, who manages more than $1.8 billion of assets including the Fidelity Select Gold Portfolio. (FSAGX) With gold trading at about $1,235, it “might not be a bad thing” if the number of producers was reduced by a similar percentage.
“It’s part of the life cycle of industries that every so often you need to have a cleansing of that which is not working,” Wickwire said in a phone interview last week from Boston, where Fidelity is based.
Gold producers, which are gathering for the annual invitation-only Denver Gold Forum that began yesterday, cut budgets, sold assets and adjusted mine plans after the metal plunged 28 percent last year, prompting more than $26 billion of writedowns. The industry already has started a consolidation process, Wickwire said.
“The industry did a very poor job from a capital-allocation standpoint, from a risk-management standpoint and from an operational-execution standpoint,” he said. “For long-term oriented investors it would be better for the industry to get more right-sized where companies are focused on generating profit at a conservative gold price assumption.”
‘Darwinistic Scenarios’
Combining companies can help eliminate their respective unprofitable operations, he said. Weak companies with good assets may also be targeted by stronger producers, he said.
“Or the least appealing of the Darwinistic scenarios is a company that has gotten all of those things — capital allocation, risk management and operational execution — wrong and they wind up going bankrupt,” he said.
There have already been some moves toward consolidation this year. Yamana Gold Inc. and Agnico Eagle Mines Ltd. bought Osisko Mining Corp. after beating out a hostile bid from Goldcorp Inc. Barrick Gold Corp. (ABX) and Newmont Mining Corp., the two largest producers by sales, also discussed a merger this year before breaking off talks in April.
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