How an M&A frenzy could spur our gold miners' next growth phase

Our gold miners could be the next merger and acquisition hotspot but this may not be a good omen for shareholders. Here's why.

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The next merger and acquisition (M&A) hotspot could be in our gold sector as the share price performance of our precious metal miners has outperformed their global peers.

The case for an asset shopping spree is building with a report on Bloomberg noting that our miners enjoy some of the world's best profit margins, low debt and a cashed-up balance sheet.

This should serve as a warning sign for shareholders in my view but before I get into that, it's worth pointing out that the S&P/ASX All Ords Gold (Index:^AXGD) (ASX:XGD) index of gold miners has surged ahead 16%, with Northern Star Resources Ltd (ASX: NST) and St Barbara Ltd (ASX: SBM) rallying 61% and 50% over the past year, respectively, when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up 9%.

The performance is more impressive when contrasted to their global peers. The iShares ETF of global miners has tumbled 11% over the past 12 months – opening a unique opportunity for our local players to make earnings accretive acquisitions due to the valuation differentials.

Talking about valuation, experts have noticed that ASX-listed gold stocks are trading on par with their North American rivals for the first time in living memory. ASX stocks, whether in or out of the gold sector, have typically traded at a discount to their US counterparts.

This is perhaps one reason behind Newcrest Mining Limited's (ASX: NCM) move to invest US$250 million into Canadian gold miner Lundin Gold Inc. this year.

What is probably also spurring M&A interest is need for a new growth option for our local miners, in my opinion.

The gold price in Australian dollars has contributed materially to the fat margins in the local sector but Aussie miners will need something else to excite investors if they want to keep their price premium. Takeovers are one obvious catalyst.

But the problem I have with that strategy is that the move could remove the very thing that is giving our local players a global edge.

The falling Australian dollar is a double-tailwind as it also puts a cap on operating costs at mines in Australia.

A move to buy North American assets will reduce the exchange rate advantage and may put pressure on margins. I am also normally wary of ASX-listed companies expanding overseas unless they have a proven track record and there aren't many Aussie gold miners that would fall into this category.

The fact that the boards of these miners are focusing more on M&A signals to me that the sector's golden run may have reached a peak and that the valuation between ASX-listed and North American gold miners may start to revert to the mean over the coming months.

If you are looking for a sector with a lot more blue-sky upside, you will want to read this free report from the experts at the Motley Fool.

They have uncovered a niche segment of our market that is poised to outperform in FY19 and beyond. Follow the free link below to find out what this sector is and the stocks best placed to ride this emerging boom.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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