When the markets melted down last year, the assumption among most experts was that we would see a new wave of consolidation in 2009 as senior producers picked off undervalued juniors. But, it didn't really happen.
As Canaccord Adams analysts Wendell Zerb, Eric Zaunscherb and Nicholas Campbell pointed out in their "Junior Mining Weekly" report, the real trend has been juniors merging with each other. In a couple of recent cases (Klondex Mines Ltd. (KLNDF.PK) and Northern Continental Resources Inc.) junior companies actually outbid senior companies for assets. That is not the way the game is supposed to be played.
The analysts suggested four reasons why the larger-cap companies have been reluctant to take over junior: they have older and more conservative boards, they have been chilled by litigation risk (you could call that the "HudBay (HBMFF.PK) Effect"), they are using more conservative commodity price assumptions, and they have focused on mergers of equals to create "mega" companies (Xstrata PLC's (OTC:XSRAF) approach to Anglo American PLC (AAUK) would be one example).
But all that said, the analysts noted that it may just be a matter of time before large-cap companies with deeper pickets take a more active role in this latest wave of M&A activity.
The intermediate and senior mining companies, in general, possess far superior balance sheets and higher market valuations, which should ultimately make potential mergers and acquisitions more accretive and easier to finance.