Optimism. Momentum. Buoyancy. Call it what you will, a positive current is running through the gold space. Macquarie Capital Markets' Canadian Mining Equity Research Team Head, Michael Gray, deconstructs some of the factors contributing to that newfound energy. Calling out merger & acquisition activity as a nascent trend, he shares with The Gold Report some of the names that could be on a senior gold producer's shopping list.
The Gold Report: Many described the mood at the recent Prospectors and Developers Association of Canada [PDAC] conference in Toronto as something close to cautious optimism. You were there. Can you give our readers three reasons to believe a corner has been turned?
Michael Gray: Number one is the gold price being in the $1,330-1,370/ounce [$1,330-1,370/oz] range. Few people expected that at the start of the year. Indeed, many were predicting gold below $1,200/oz. Number two, a number of companies have received a stay of execution. There is a fertile environment for raising capital. Equity deals and a number of small merger & acquisition [M&A] deals are being done. That leads to number three, and the most important, which is Goldcorp Inc.'s (NYSE:GG) bid for Osisko Mining Corp. (OTCPK:OSKFF). That is the kind of big M&A activity we haven't seen for a long time.
TGR: As far as equity deals go, how does your deal flow today compare to January and February 2013?
MG: I would say it's night and day. There was very little activity in the markets for most of 2013. The tax-loss selling that happened toward the end of 2013 put the squeeze on the juniors and there was a marked increase in small-scale M&A during Q4/13. In early 2014 a stronger gold price combined with further M&A and sector outperformance generated more optimism. That momentum continues. It has been important to see more deals come through on equity financing. We're seeing a healthy number of deals, many of them underwritten.
TGR: Is a gold price above $1,300/oz sustainable for 2014?
MG: Our house view is that the price will be softer in the second half of the year. However, a number of wild cards could come into play: increased buying of gold by China and the controversy over the official versus the unofficial gold sales in India along with the gold import tax dynamic, to name two.
TGR: Every Canadian small-cap gold producer was trumpeting the benefit of a weak Canadian dollar at PDAC. Is the impact of a $0.90 loonie really that much of a boon?
MG: It is as long as the operating costs and the sustaining capital costs are in Canadian dollars. Typically reagents and some materials are in U.S. dollars, so producers don't get the same leverage on those costs.
We have to analyze it case-by-case, but we're finding that the majority of the small-to-intermediate Canadian asset producers have great leverage against a weakening Canadian dollar.
TGR: Can you elaborate on the Goldcorp-Osisko merger?
MG: There are very few 500,000+ ounce/year [500+ Koz/year] assets out there for the seniors to buy, let alone in North America. Out of the 11 operating mines in Goldcorp's portfolio, on a pro forma basis, Osisko's Canadian Malartic asset would be among the top three production-wise, if the bid succeeds. This is the biggest dollar value deal we've seen for a long time.
It also speaks to Goldcorp's increased focus on Canada, and with the Éléonore development project in Québec in particular, as it will be in production in November 2014. No question in our view, Goldcorp is highlighting the value of being exposed to a weakening Canadian currency.
Of all the seniors, Goldcorp has the best pipeline of quality assets. After getting through this particularly high initial capital cost [capex] year-2014-the Street will increasingly shine a light on Goldcorp, in our view. With Osisko in its portfolio, the light would shine even brighter.
TGR: Is this a harbinger of further M&A?
MG: Yes, in the sense that the seniors are looking to buy quality production and pipeline assets. If the Goldcorp-Osisko deal goes through, other producer targets in the 500+ Koz gold/year category in the Americas include Detour Gold Corp. (OTCPK:DRGDF) and in the eventual 300+ Koz/year category AuRico Gold Inc. (NYSE:AUQ).
TGR: When it comes to taking positions in these companies, do you recommend accumulating on dips or taking full positions when possible?
MG: It varies by company. If it's a high-conviction call and you take a 12-month view as we do, we would gain exposure to the best of breed assets.
TGR: Any final words of wisdom for us?
MG: Even though we've turned one corner, investors need to be aware that we could turn another corner-not necessarily a positive one. I think we should be very prudent. Focus on quality companies with low cost structures, attractive assets and good management.
TGR: Michael, thank you for your time and your insights.
This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.
Michael Gray is a mining equity analyst with Macquarie Capital Markets and covers a range of precious metal explorers and producers with an emphasis on North and South America. He is an exploration geologist and holds a Bachelor of Science in geology from the University of British Columbia and Master of Science in economic geology from Laurentian University. His career of more than 25 years in the mineral exploration business started with senior mining companies including Falconbridge, Lac Minerals, Cominco and Minnova where he worked throughout Canada and the USA. He co-founded Rubicon Minerals in 1996. He is also a past President of the 5000+ member BC & Yukon Chamber of Mines [now AME BC]. Gray joined the mining analyst world in 2005 where he brought to bear his technical skills to identify new precious metal opportunities at an early stage with outstanding exploration potential; he has covered a number of these opportunities that were subsequently taken over by gold producers.
1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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3) Michael Gray: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: All except Goldcorp Inc. and Barrick Gold Corp. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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