Gold Miners: Spate of Acquisitions Bound to Increase

Includes: GG, KGC, TORXF
by: Goombarh

As gold prices rise, the spate of gold company acquisitions is bound to increase. 2010 was tumultuous with three major multi-billion gold acquisitions: the $ 10 billion acquisition of Australian Lihir Gold by fellow Newcrest Mining (OTCPK:NCMGY), the $7.1 billion combination of Canada's giant Kinross (NYSE:KGC) and fellow Red Back, and the $3.5 billion Canadian giant Goldcorp (NYSE:GG) buy-out of Australian Andean Resources.

More recently, there is the announced $2.3 billion acquisition of Canada's Fronteer Gold by American giant Newmont Mining (NYSE:NEM).

Smaller deals include the $830 million Franco-Nevada (NYSE:FNV) pending purchase of Gold Wheaton, the $700 million American Thompson Creek Metals (NYSE:TCM) takeover of Canadian Terrane Metals and the previous $140 million Kinross takeover of Underworld Resources.

The larger gold miners are just not able to succeed at their own organic gold exploration programs and need to acquire the smaller more capable exploration companies to replenish their mining reserves, as detailed here in a previous posting. This sets the stage up nicely for the smaller companies that are geologically competent and are busy drilling and proving up their resources and reserves. Following are two examples.

Victoria Gold Corporation (VITFF, TSX: VIT)

The following is an excerpt from the company's self profile on their website:

Victoria’s transformation and growth is ongoing with the most recently achieved milestones being the successful completion of the Preliminary Assessment on the Cove Project and the Pre-feasibility on the Eagle Project.

Of Victoria's two key projects, the Eagle Gold Project in Dublin's Gulch in the Yukon, with an indicated resource of 3,000,000 ounces (2009) of gold, is the largest. Victoria has just completed building a 200 person all season work camp in preparation for continuous exploration and drilling year-round. A Feasibility Study was recently commissioned for the Eagle Gold project.

Their second key project is the advanced Cove project, based in Nevada on land leased from Newmont Mining. This project consists of a previous producer's open pit and underground mine that has produced 2 million ounces of gold and 100 million ounces of silver in the past. It is interesting that Newmont Mining has a back-in clause once Victoria completes key conditions in their Preliminary Assessment.

Last Fall, Victoria suffered a 30% drop in share price upon publicizing an interpretation error in the previous operator's drill results for the Cove. This necessitated a recalculation for the Preliminary Assessment, which is now underway. For 2011, Victoria is conducting further underground drilling at the Cove and surface drilling at the adjacent Helen Zone.

Kinross Gold in 2008 took an interest in Victoria Gold, acquiring 34% of the company. Since then the Kinross interest has been lowered to 20% with further financings, though Kinross was keen and participated to keep a 20% share of Victoria.

Torex Gold Resources (OTCPK:TORXF)

Torex Gold Resources' main aim in life is to be taken over by Goldcorp (author's interpretation). Torex has one main project the Morelos Gold project that is in the Guerrero Gold Trend of Mexico. Presently, Torex's Morelos project boasts a resource (October 2009) (.pdf) of about 3,000,000 ounces of Gold at an average grade of about 3 grams Au/ton.

Interestingly, Goldcorp is right next door operating their dual open pits of the Los Filos mine; it is Mexico's largest producer. Los Filos has 5 million ounces of reserves and another 3 million ounces of resources. Production is estimated to be 300,000 ounces of gold per year. The mine opened in 2008 and has an estimated life of 8 years left.

Torex is working post-haste to increase their resources with 11 drills working in an 100,000 meters drill program for 2011. An updated resource estimate is expected in Q3, 2011. Torex's latest news on February 10, 2011 that announced expansion of their resources is here (.pdf).

Acquisition Approach

The typical modus operandi of the large gold firms may be to first take a smaller position in the target company early, to keep closer tabs on the resource definition activities. Note the sizable position in Victoria Gold already taken by Kinross Gold. Further, Victoria's Dublin's Gulch project is quite close to production, increasing the attractiveness of the asset. A dark horse acquirer may be Newmont Mining, which has large operations in Nevada and may just take the Cove project over from Victoria Gold.

Another factor to consider in acquisition is the closeness of the target gold project to an existing operation of the large gold firm. Witness the 2009 Goldcorp takeover of Canplats Resources to gain their Camino Rojo project, which was 50 miles from Goldcorp's Penasquito mine. Note that Torex Gold's Morellos project is within 10 miles of Goldcorp's Los Filos mine. In addition, Goldcorp has cash available, having just sold their shareholdings in Osisko Gold gaining proceeds of $500 million.

Overall, the timing is critical for acquisitions; the acquirer has to have sufficient resources to deploy. The price of gold has just given possible acquirers good capital in the form of their share prices. Also for the target companies, they need to be in advanced stages of their project development, but yet not too far along so that their assets may command too much of a valuation premium. In this analysis, it seems the timing may be right at this stage of the gold bull market, and both targets are very attractive for their respective suitors.

Disclosure: I am long OTCPK:TORXF. I am also long Victoria Gold (VITFF).