There will be an unprecedented wave of merger and acquisition activity in the gold and silver space that will see junior miners and development companies victimized by factors beyond their control and snatched up by senior and mid-tier producers making use of their healthy cash flows and stable balance sheets, according to a new report from Blackmont Capital.
Analyst Richard Gray said in a research note:
While there remain several junior companies with projects that are expected to ultimately be economic under the current gold price, a significant amount of upcoming mergers and acquisitions are likely to be done under the assumption that the gold price will increase in the longer-term.
He said seniors like Barrick Gold Corp. (ABX) and Newmont Mining Corp. (NEM) are likely looking for immediate production, Kinross Gold Corp. (KGC) is trying to fill in its growth gaps, and names like Goldcorp Inc. (GG), Yamana Gold Inc. (AUY) and Agnico-Eagle Mines Ltd. (AEM) are seeking to capitalize on strong cash flows.
At the same time, mid-tier gold producers like Eldorado Gold Corp. (EGO) may be trying to pick off geographically strategic development projects, while names like Iamgold Corp. (IAG) and New Gold Inc. (NGD) trying to meet stated goals of growth through acquisition.
Junior producers like Semafo Inc. (SEMFF.PK) are also likely seeking more assets, with companies like Jaguar Mining Inc. (JAG) expected to take advantage of its strong balance sheet and Northgate Minerals Corp. (NXG) its strong cash flow, Mr. Gray noted.
Mr. Gray said:
We also expect the struggling junior market to look towards more mergers in order to gain the critical mass to be relevant. In the current uncertain market, investors look for size and liquidity and the one-project juniors typically do not provide these important characteristics.
On Monday, First Quantum Minerals Ltd. (FQVLF.PK) said it is seeking takeovers after the credit crunch caused financing difficulties for its smaller competitors. Octagon Capital analyst Hendrik Visagie agrees with that approach, suggesting that cash rich juniors without projects in development seek tie-ups with juniors that have production but need financing to survive.
Mr. Visagie said in a note:
Cash and cash flow are king, juniors who do not have a large treasury and cash flow are having difficulty raising capital to finance their projects, even if they are extremely attractive.
He believes it is cheaper to buy projects than to develop them, and recommends that investors look at names that are in a good position to use their balance sheets to acquire undervalued assets.
Blackmont's Mr. Gray suggested that a three-way merger between Aurizon Mines Ltd. (AZK), Jaguar and Semafo, for example, would look a lot like Iamgold, but they would have a combined market cap roughly 38% lower. “In this market, bigger is quite likely to be considered better,” Mr. Gray said.
In the silver sector, major players Fresnillo Plc (FNLPF.PK), Pan American Silver Corp. (PAAS), Silver Wheaton Corp. (SLW), Hecla Mining Co. (HL) and Coeur d’Alene Mines Corp. (CDE) are all said to be looking for opportunities in the devalued junior space. If any two or three of Pan American, Coeur d’Alene and Silver Standard Resources Inc. (SSRI) were to merge, this would create a big cap name that could compete with Fresnillo and possibly get some of the same big cap bias senior gold producers get, the analyst said.
Mr. Gray recommends investing in larger producers such as Kinross and Yamana, saying they are not only potential targets for their larger rivals, but offer attractive valuations and generate strong cash flows. He also suggested clients have positions in Jaguar, First Majestic Silver Corp. (FRMSF.PK) and Silver Standard due to their healthy fundamentals and takeover potential.
To demonstrate the mood of the market and how they are valuing miners’ resources, the analyst noted that senior gold names are trading at an average of $198 per ounce compared to $74 for the mid-tiers and $29 for the juniors. Senior silvers, meanwhile, trade at an average of $3.22 per ounce versus $0.98 for the juniors.
While other factors come into play when an acquisition is being considered, Mr. Gray said this advantage is nonetheless important when justifying the premiums often seen in gold and silver deals.