Most industries tend to consolidate over time. That’s because they start out with a large number of players. As those who are overleveraged or poorly managed go bust, the better-run companies start to buy up worthy competitors to build their market share.
This trend is currently underway in the gold sector. A number of deals have occurred in the past few years that have set records. And this week saw yet another merger announcement that will further keep competition down.
The latest move is Newmont Mining’s (NEM) acquisition of Australian gold and copper company Newcrest. Valued at $17.5 billion, it’s the largest merger in the space. More importantly, it will diversify Newmont out of mining gold.
Given that gold prices can be cyclical, but that base metals such as copper operate under a different economic cycle, it could smooth out Newmont’s earnings and growth over time.
Action to take: Even with gold prices hold up well, Newmont is down about 30 percent over the past year. Yet if gold prices take off, in the short-term mining companies will deliver better percentage returns. And as long as gold prices hold up well, so will the stock’s variable dividend, which was about 3.5 percent in the most recent quarter.
For traders, Newmont shares rallied on the news, which shows market approval for the big merger. But a big move higher will likely take a rally in gold. The January 2024 $55 calls, last going for about $2.75, could leverage a move higher between now and the end of the year.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.