Junior Gold Producers May Get Boost from M&A Activity

The average value of non-producing gold companies relative to their resources fell to a new low last week when gold dipped to $772 per ounce, but this could prove to be a “low water mark” for the group.

For the 40 or 50 junior gold miners RBC Capital Markets has tracked for the past couple of years, the average adjusted market capitalization per total resource ounce has fallen to $26 per ounce from $43 in early June, and declined as low as $24 last week. The group average has typically fallen in the range of $50 to $75, analyst Michael Curran told clients.

So with valuation levels so much lower, investors are surely hopeful that the bottom has arrived. One factor that could provide a boost is increased M&A activity. Mr. Curran noted that the Aurelian (AUREF.PK)-Kinross (KGC) and Gold Eagle (GEAFF.PK)-Goldcorp (GG) deals give him more confidence that more tie-ups lie ahead, particularly if gold prices rise later in the year as RBC forecasts.

In a research note he said:

We maintain our view that the Jr. Golds that are successful in advancing their projects towards construction can be rewarded with higher trading multiples and/or become attractive takeover candidates.

RBC suggests investors look to names with higher grade deposits and low political risk, highlighting Turkey-focused emerging producer Anatolia Minerals Development Ltd. (ALIAF.PK) as its “Top Pick.” Its other favorites are Andean Resources Ltd.[AND/TSX], Banro Corp.(BAA), Osisko Mining Corp. (OSKFF.PK) and Central Rand Gold Ltd.

Comments

[beabaggage:]

Agree, been averaging down my cost into a nice long position in NXG, safe country assets, no debt, good prospects/mgmt/ trading at/below book with great cash flow.
With the problems in the 3rd world- lack of power/politics/experie... labor/nationalization!, GG and Barick will be on the hunt to add to safe country resources. GFI and others may also be tired of their problems in South Africa, Ghana etc.
The advantage to majors now even if their stock prices fall is they have little hedging and great cash flow. I am sure NXG shareholders/mgmt would love to get out at 3.50/$4 a share, vs 1.70 now. Mines in CN/AUS, off balance sheet asset in Kemess North w gold/copper just waiting for the right co. to placate the locals on "green" concerns.
Co has assets(plant/equipment... labor) in place paid for ready for the next mine or for GG or Barrick to move to another CN site etc. So lots of good stuff at 600 or 1200 an ounce.
Thank you for the Avg Junior mkt cap to resource ounce stat, did not know about that one.

2008 Aug 24 01:13 PM

[Clavis:]

' One factor that could provide a boost is increased M&A activity. Mr. Curran noted that the Aurelian (AUREF.PK)-Kinross (KGC) and Gold Eagle (GEAFF.PK)-Goldcorp (GG) deals give him more confidence that more tie-ups lie ahead, particularly if gold prices rise later in the year as RBC forecasts.'

Not in the case of the poor Aurelian Resource Inc. retail shareholders, they thought that the were going to have a serious pay day; sitting on the biggest gold find in the last twenty years; but their management sold them down the river so that they will be lucky to see $5 + worthless warrants instead of $20+.
At least they have the guts not to take it lying down and have formed a 'revolt' operation to fight, come what may! Follow the story at agoracom.com ARU.
This kind of 'bad publicity' is just what this segment of the market does not need, rotten apples are not needed in the hard working miners barrel.

2008 Aug 24 04:28 PM

[MARK&SHARK:]

I think the smarter comment would be to go short mining stocks when GC was trading at 1000$ and now cover shorts.Too little,too late.
NEVER BUY STOCKS ON PINK SHEETS.

2008 Aug 25 10:40 AM

[secmaven:]

Amen to Mark and Shark. The spreads are ridiculous. The cost to convert into and out of Canadian dollars needed for many junior golds is ridiculous. And the size is a joke.

2008 Aug 25 10:52 AM