Issue link: http://resourceworld.uberflip.com/i/1207716
28 www.resourceworld.com F E B R U A R Y / M A R C H 2 0 2 0 production and cash flow. Management teams responded by rais- ing money, which was sunk into the ground in pursuit of new deposits and successful company prices rose by several multiples and were sold to mid-tier and senior companies. Then gold prices cor- rected to US $1,000/oz in 2015 and with them the share prices of most gold compa- nies collapsed. Investors suffered losses, and even the senior gold companies suffered a col- lapse in profits and managers were forced to focus on capital discipline, operational cost control and lower debt levels in order to survive. But now, with gold prices on the rise again in response to the current macro- economic problems, unprecedented global debt levels and geopolitical instability, it's again a game changer for miners. Investors are once again encouraged to seek growth in reserves, and the gold com- panies are forced to abandon their cautious approach and look at mergers and acquisi- tions as they are a quicker way to obtain growth as compared to exploration drilling. Many gold sector veterans have long predicted consolidation of the gold sec- tor. The world's economically accessible reserves are dwindling, and gold miners need to find more reserves to keep the pipeline full. This is a challenge, however, because the large deposits which have not already been discovered are located in harder to reach places, with more jurisdic- tional risk and higher production costs. Therefore, with fewer reserve discoveries and the rising costs of gold exploration, mergers and acquisitions are much cheaper and faster than expanding gold through exploration and the next logical step to stay in business and grow. Another clear driver of the merger mania has been the rising price of gold, which broke through US $1,600/oz in early January for the first time in eight years and driving increased interest to the market, which gold veterans suggest marks the beginning of a gold bull market. On the surface, all the typical omens of a bull rally in metals seem present: a drop in the dollar index, disappointing economic and jobs data in the US, and the escalating geopolitical tensions in key locations like Iran and Venezuela – which have pushed investors towards safe haven assets and pushed the price of gold up which is likely to bolster further consolidation in the min- ing sector. "Right now, I have such a strong con- viction that we're in the early stages of a bull market, so whatever we can buy today that has leverage to gold will offer fabulous value," Ross Beaty, chairman of Equinox Gold told the Financial Post recently. Gold Resource Corporation [GORO- NYSE] CEO Jason Reid said the rapid pace and escalation of mining deals signals that companies believe the industry is moving back into a bull market in precious metals. "Acquiring ounces before the bull mar- ket fully takes hold seems to be the strategy. Once the bull market is on solid ground, M&A opportunities will get expensive fast. The industry has been known to pay two to three times more for assets than they were worth during the last bull market. Many CEOs and management got fired for that not too long ago. The time to do M&A is well before the peak," say Reid. Another driver according to gold ana- lysts is there are too many smaller gold companies competing for a limited pool of capital, driving the cost of capital up. Single asset miners, those with one mine, or one development project are seen as a high risk for investors, and are being encouraged to find suitors. For example, the Shareholders' Gold Council reported that it analyzed 47 gold mining companies, and found higher general and administra- tive expenses on average than non-gold mining companies. "Single-asset and intermediate produc- ers, in particular, had higher costs, pinned at 10 to 12% of cash flows compared to 4.2% for non-gold mining companies," the Council said. Bigger is better is the mantra for many INVESTMENT