By Verena Kallas
Although high gold prices are encouraging gold miners to boost their production as much as possible in order to bring their reserves to market, gold mining stocks have broadly underperformed compared with the gold commodity price. Part of the difference is due to the greater risks faced by miners, including production delays, distribution costs and political risks, which are not priced into the value of gold as a product.
In 2011, the divergence has been greater than before: while gold appreciated for most of the year, the large miners have generally depreciated. Junior gold miner stocks, which are even more volatile than the seniors, have shown the worst performance relative to the price of gold, leaving them more vulnerable to being taken over.
In order to increase their gold reserves without the expense of exploring for new mines themselves, top producers such as Barrick Gold (ABX), Goldcorp (GG), Newmont Mining (NEM), AngloGold Ashanti (AU), Kinross Gold (KGC), AuRico Gold (AUQ) and Rio Tinto (RIO) could be interested in buying out small mining companies, particularly those with projects located in areas close to their own operations. Low interest rates should also encourage miners with large cash positions to acquire gold resources now, as long as the demand for gold still exceeds supply. This may be an even better way to play what we think will be a new price level of $2000 for gold.
A major gold deal in 2011 was the acquisition by Newmont Mining of Fronteer Gold for about $2.3 billion in cash. Another notable transaction was the $1.5 billion takeover of Northgate Minerals by AuRico Gold via a share exchange. The deal will double AuRico Gold’s production and give it a foothold in Canada, and Australia. The pending $2.4 billion acquisition by Eldorado Gold (EGO) of European Goldfields (OTC:EGFDF) will help it to surpass the annual output of its rivals Agnico-Eagle Mines (AEM) and Yamana Gold (AUY).
Smaller recent deals include Agnico-Eagle Mines’s purchase of Grayd Resource (OTC:GYDRF) for about $226 million in cash and shares at a 66% premium. The main attraction is Grayd's La India deposit, which is not far from Agnico-Eagle's Pinos Altos Gold Mine in Mexico. B2Gold (BGLPF.PK) just completed its $127 million cash-and-stock acquisition of Auryx Gold, owner of gold projects in Namibia, at a 74% premium.
The next targets in the gold sector are expected to be mostly among smaller miners with high-grade results and growth potential, as well as little or no debt and low execution risk. They include:
Extorre Gold Mines (XG): Extorre Gold Mines is a junior miner that has not yet arrived at the production phase. Its gold resources at its flagship Cerro Moro project in Argentina are estimated at 2 million ounces (Moz). Eldorado Gold is a potential suitor. It had made a bid for Andean Resources, with its Cerro Negro gold project close to Cerro Moro, but could not beat Goldcorp’s $3.42 billion offer. Since that deal closed in late 2010, Goldcorp has grown Andean's Cerro Negro from 2 Moz to over 5 Moz. Extorre's Cerro Moro could have similar growth prospects. Extorre has total cash of $39.87 million and no debt. Its price-to-book ratio is 16.67 and its market cap is $705.22 million.
International Tower Hill Mines (THM): International Tower Hill Mines holds a 100% interest in the Livengood gold project in Alaska. The project has resources of more than 10 Moz of gold, placing it in the in the top 2% of gold discoveries. THM’s advantages are a favorable permitting situation without native claim issues and access to infrastructure. The mine is right off an all-weather central highway in a major mining center. The state of Alaska is planning a natural gas line that would provide power to the project. Kinross Gold could be interested in THM as its Fort Knox mine is down the road from Livengood. The mine life of Fort Knox will be nearing completion just as that of Livengood begins. THM is debt-free and has total cash of $92.54 million. Its market cap is $ 389.21 and its P/B Ratio is a low 2.26.
Kimber Resources (KBX): Kimber Resources is a junior mineral resource company active in the acquisition, exploration, and development of gold and silver deposits in Mexico. Its principal asset is the Monterde Property, which consists of 35 mineral concessions in the Sierra Madre Mountains. Monterde is expected to produce about 60,000 ounces of gold and 1.9 Moz of silver per year for about 12 years. Current explorations are encountering high-grade, multi-ounce material and opening up the possibility of a significant increase in the deposit size. Kimber could draw interest from existing Sierra Madre gold belt producers, including Goldcorp. With a market value of $77.49 million, KBX is a small-cap potential investment. It has total cash of $11.05 million and no debt. At a price/book ratio of 1.24, the company looks undervalued.
Taseko Mines (TGB): Taseko Mines has a mix of operational and project-stage mineral properties in British Colombia, Canada. Its main producing asset is the Gibraltar Copper-Molybdenum Mine, the second largest open pit copper mine in Canada. The New Prosperity Gold-Copper Project, which holds an estimated 13.3 Moz of gold and 5.3 billion pounds of copper, has been opposed by native tribes, but the federal government has agreed to a second environmental review after Taseko made changes to address the ecological concerns. TGB’s other less developed projects include the Aley Niobium Project and the Harmony Gold Project. Its growth potential makes it an attractive takeover target and its P/B ratio of 1.14 looks cheap. TGB has a current market value of $551.48 million, and total cash of $371.82 million compared with $234.35 million in debt.
Yamana Gold (AUY): Yamana Gold is a mid-sized gold producer. Its main asset is El Penón in Chile, which it acquired through the takeover of Meridian Gold. It also has projects in Brazil and Argentina. Yamana could fit in with Kinross's Chilean and Brazilian mines or Barrick's operations in Chile and Argentina. AUY estimates its 2011 production to be in the range of 1.04 million to 1.14 million gold equivalent ounces (GEO). Production is expected to increase to approximately 1.7 million GEO by 2014. Despite an improving production outlook, AUY has been trading at a discount to its competitors. Its price/book ratio is a low 1.49. The company's market cap is $10.20 billion; it has total cash of $570.49 million and $430.91 million in debt.