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Why you can expect more M&A in the ASX gold sector

The Northern Star Resources Ltd (ASX: NST) share price is leading the large cap gold miners higher after its takeover for Echo Resources Limited (ASX: EAR) went unconditional this morning.

The Northern Star share price jumped 1.4% to $11.44 this morning when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained 0.4%.

Other major gold stocks are trailing behind Northern Star with the Newcrest Mining Limited (ASX: NCM) share price adding 0.7% to $36.22 and the Evolution Mining Ltd (ASX: EVN) gaining 1.1% to $4.81 at the time of writing.

The chances are this isn’t the last we will see of mergers and acquisitions in the precious metals space as gold is a hot commodity with central banks from China to Russia hoarding the metal while global investors fret over fiat currencies as interest rates around the world appear to be heading towards zero.

There’s good demand for Australian gold assets thanks to the weak Australian dollar. The exchange rate makes the cost of running domestic mines more competitive than in other jurisdictions that use the US dollar or have a relatively stronger currency.

Takeover rationale

This is the perfect climate for gold and macroeconomic conditions will fuel appetite for more gold takeovers. Northern Star is wasting no time in swallowing its smaller brethren Echo Resources, which owns the Yandal Gold Project.

The project sits on the same belt in Western Australia as Northern Star’s Jundee mine, and houses a mineral resource of 1.7 million ounces of gold and ore reserves of 815,000 ounces.

Echo said it is confident it will continue to substantially expand its reserves through the application of modern exploration techniques, which have never been applied in the region.

Will a rival bid emerge?

Northern Star currently owns 21.99% of Echo and its cash offer of 33 cents a share is supported by the target’s independent directors. Given that Echo’s share price is also sitting at the same level as the offer price when Northern Star’s offer went unconditional, the market isn’t expecting a rival bid to emerge.

A counteroffer isn’t out of the question of course, but with Northern Star holding a blocking stake in Echo, any rival will need to cough up big to snatch the prize (or it could be a competitor determined to prevent the takeover by buying just enough shares in Echo to spoil the party, which is also unlikely in my view).

Too late to buy gold stocks?

Investors should already own gold shares as the sector is a good hedge against the global headwinds. Those who have been slow to pick up ASX gold will now have to cough up a premium as the sector is one of the best performing parts of the market.

It’s probably still worth buying some exposure to gold if you have nothing as the tailwinds that are lifting the sector is unlikely to abate anytime soon.

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Motley Fool contributor Brendon Lau owns shares in Evolution Mining Ltd. Connect with him on Twitter @brenlau.

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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