In the wake of the pending $3.6 billion dollar buy-out of the gold junior Andean Resources (OTC:ANDPF), expansion-minded major mining companies are poised to gobble up more asset-rich gold explorers. So says the dominant U.S. investment banker, Bank of America Merrill Lynch (BofAML), in a September research report entitled “Global Gold M&A Heats Up.”
The report’s Toronto-based lead mining analyst, Michael Jalonen, (who was hailed by Forbes Magazine in 2008 as one of the best in the business) says:
For the balance of 2010, we expect the reserve-hungry senior and mid-tier producers to continue focusing their attention on resource-rich junior producers and developers.
With gold prices vaulting to new highs, major gold miners are now armed with strong balance sheets, Jalonen notes. And the race is on to ramp-up their production figures to continue to cash in on a secular bull market in gold prices. But that’s not proving easy.
In spite of bullion’s spot price more than quadrupling since its lows of eight years ago, these deep-pocketed gold miners have found themselves scrambling to replenish dwindling inventories. Their daunting challenge now is to finally buck a global decade-long trend of falling output numbers, which have been consistently dropping at around 5% per annum. So cashed-up gold producers are starting to aggressively target takeover candidates with undeveloped multi-million ounce discoveries, rather than merely relying on organic growth.
By our count, the top ten gold producers under coverage will need to replace 38 million ounces of gold reserves mined in 2010. We estimate the biggest gold companies could generate $80 billion of free cash flow over the 2010-2015 period that could be deployed for acquisitions.
“This trend bodes well for other companies with world class development projects.” Not the least of which is Exeter Resource Corp. (NYSEMKT:XRA), which tops BofAML’s list of the ripest plums among the ranks of aspiring gold miners.
Big league investment industry firms ordinarily prohibit their analysts from speaking directly with the media and that includes BofAML. But the reasons why it must favor Exeter Resource so highly are obvious, according to several research analysts and fund managers with other investment firms that we spoke with.
They point to the fact that Exeter owns by far the largest undeveloped gold discovery in Latin America in recent years – the Caspiche deposit. Weighing-in at 21.3 million ounces in the highly reliable “measured and indicated” category, it sits at the heart of northern Chile’s prolific Maricunga gold belt. (A further 5.1 million ounces of gold have been outlined in the less definitive “inferred” category).
Only the nearby Cerro Casale gold mine-in-the-making edges Caspiche as the biggest of all of South America’s emerging gold mines and deposits. Jointly-owned by global mining powerhouses, Barrick Gold (NYSE: ABX) and Kinross Gold Corp. (NYSE: KGC), it hosts 26.4 million ounces of gold reserves. (Both deposits also host world-class copper resources).
According to mutual fund managers Marshall Berol and Malcolm Gissen, the “bigger the better” is typically the mantra of major miners when sizing up takeover opportunities. And that makes Exeter Resource a stand-out candidate in their opinion. Berol and Gissen manage the San Francisco-based Encompass Fund, which has a heavy weighting in mining equities, and which has been a stellar performer over the past couple of years as a result of a resurgent market in gold stocks.
“It’s increasingly difficult to find large gold discoveries. There aren’t many left anywhere in the world,” Berol says.
So the few junior gold developers with world-class finds, like Exeter Resource, are going to be increasingly attractive takeover targets for large miners.
Caspiche is located among a cluster of lucrative gold mines in one of the world’s most lustrous mineral belts, where over 100 million ounces of gold have been discovered to date. And the fact that the region has ample mining infrastructure already in place adds to Caspiche’s allure for major miners, Berol adds.
The Maricunga gold belt also offers another key geopolitical advantage to a spectrum of prospective mid-sized to major gold-hungry suitors that are reported to be circling overhead. Specifically, Chile is a politically stable democracy that has long been mining-friendly, especially since this capital-intensive industry is essentially the backbone of its economy.
The big players in the area in close proximity to Exeter Resource are Barrick Gold, Goldcorp Inc. (NYSE: GG) and Kinross Gold, says Berol. In particular, Barrick Gold and Kinross Gold own most of the Maricunga gold camp’s prized assets. They include the two nearby mines that straddle Caspiche on each side, one of which is Cerro Casale.
Notably, Barrick recently completed a buyout of a 75 per cent stake of Cerro Casale earlier this year for the princely sum of $1.28 billion. The deal included the acquisition of another gold junior, Arizona Star Resource, which was instrumental in the discovery and development of this monster deposit.
However, Goldcorp Inc. (the world’s fifth largest gold producer and second biggest in terms of market capitalization) also now owns a lucrative piece of the action in Maricunga. Earlier this year, Goldcorp dramatically outmaneuvered Barrick Gold by snatching up New Gold Inc.’s (NYSEMKT:NGD) 30 per cent stake in the in-development El Morre gold deposit.
And that development suggests that there are now at least three major mining companies that likely have Caspiche within their crosshairs, according to one Canadian mining analyst who was willing to speak with us on condition of anonymity.
“It’s more likely that you’ll have interest from someone who already has a geographical focus there,” he says.
And it’s no secret that Caspiche would fall into a takeover scenario because of the size and grade of the asset. And of course its location is important. It sits right between two mining operations owned by Kinross and Barrick. Also, the El Morro deposit, in which Goldcorp has a stake, is a little bit further to the south.
This assessment appears to be shared by BofAML, with Jalonen noting in his “Global Gold M&A Heats Up” research report that:
we believe the senior gold producers will be focusing on….reviewing potential synergies in regions with adjacent operations and acquiring development project companies with multi-million ounce deposits.
Other asset-rich gold development juniors that were identified by BofAML as prospective takeover candidates are as follows in descending order in terms of their attractiveness to would-be suitors, in BofAML’s opinion: Osisko Mining (OTCPK:OSKFF), Chesapeake Gold [TSX.V: CKG], Detour Gold (OTCPK:DRGDF), Rubicon Minerals (NYSEMKT:RBY), International Tower Hill Mines (NYSEMKT:THM), SanGold (OTC:SGRCF), Queenston Mining (OTC:QNMNF), Fronteer Gold (FRG) and Andina Minerals (OTC:ADMNF).
Of all the other gold juniors in politically stable, pro-mining Latin America nations, only two of them currently have discoveries at or above a 10-million-ounce threshold. One is Andina Minerals, which owns the Volcan deposit that is also in Chile’s Maricunga gold corridor. It weighs-in at about 10 million ounces. Then there’s Greystar Resources (OTCPK:GYSLF), with at least 11.55 million ounces of gold at its Angostura project in northern Columbia.
As an aside to this article, there were no fewer than 1,100-plus meetings involving the movers and shakers of the gold mining business and high finance in Denver last month at the gold mining industry’s prestigious annual conference, which is hosted by the Denver Gold Group. And the flurry of enthusiastic deal making that was clearly on display will be sure to translate into more headline-grabbing corporate takeovers as the gold market powers its way into 2011.
Disclosure: No positions