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M&A Animal Spirits Alive In Gold Mining Sector

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Includes: EXK, FNV, GDX, GOLD, GPL, KGC, KL, MUX, NEM, OR, SAND, STBMF, ZIJMF
by: Gold Mining Bull
Gold Mining Bull
Long only, gold & precious metals, oil & gas, contrarian
Summary

Things are getting hot in the gold mining sector to end the year.

Kirkland Lake Gold will acquire Detour Gold, while Zijin Mining is making a move into Colombia by buying Continental Gold.

I take a look at the top news of the past month in the gold & silver mining sector.

M&A Heating Up In Mining Sector

A tidal wave of mining mergers and acquisitions has hit the gold mining sector, as predicted this year by some investors and gold mining companies (GDX), including Polyus Mining and EY, among others.

Barrick Gold merged with Randgold (GOLD) in January, and that set things off. I stated in coverage: "I do think M&A activity could pick up as a direct result of this news," although I don't think I expected quite this much activity.

The Barrick-Randgold news was followed by Newmont Mining (NEM) buying Goldcorp in April. Not so fast, said St Barbara (OTC:STBMF), as it acquired Atlantic Gold. Osisko Gold Royalties (OR) later snatched up Barkerville Gold Mines in a rather curious move.

More recently, Kirkland Lake Gold (KL) made a surprising move when it announced the acquisition of high-cost miner Detour Gold, while Zijin Mining has agreed to acquire Continental Gold for $1 billion in cash and a 29% stock price premium.

Finally, we're also seeing miners acquire single assets from other miners, like when Evolution Mining (OTCPK:CAHPF) agreed to pay $375 million for Newmont-Goldcorp's Red Lake mine.

I generally feel that M&A is often good news for gold mining investors, for a few reasons. It makes sense for senior gold producers to buy other producers when there is large cost savings attached to such a deal (by reducing G&A expenditures, for example), or some synergies are realized, like the combination of exploration properties or mining operations in the same jurisdiction (one plus one should equal three, so to speak).

It's also great to see more juniors are getting bought out at a premium, instead of those juniors trying to go out and build a mine on their own (a dangerous, and often disastrous, path for many). Continental Gold's 29% premium for any investor who has owned shares over the past few years.

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Data by YCharts

I am betting that M&A will only continue to heat up into 2020 as gold mining companies look to create more value for shareholders and perhaps try to gain favor with investors who have shunned the sector following the last big drop in gold prices from 2013-15 (Note: I plan on releasing my top 5 takeover targets for my marketplace subscribers in January).

I've scoured gold mining newsletters, websites and press releases to give you the top news for the past month. Let me know if I've missed any news in the comment section below.

10. McEwen Closes $50 Million Public Offering

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McEwen Mining (MUX) has diluted shareholders again, closing on a $50 million public equity offering at $1.325 per unit, with warrants attached.

McEwen is a high-cost gold miner, reporting all-in sustaining costs of $1,363/oz in the third quarter, which led to a net loss of $11.5 million in Q3 2019.

I've helped my subscribers avoid investing in this struggling junior gold miner, as I listed the stock as a sell on my rating spreadsheet earlier this year. I continue to avoid the stock.

9. Struggles Continue for Great Panther Mining and Endeavour Mining

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Things also continue to get worse for Mexico-focused silver miners Great Panther Mining (NYSEMKT:GPL) and Endeavour Silver (EXK).

Great Panther reported not one, but two fatal accidents in November (one at the San Ignacio mine and one at Coricancha), and also revised its production guidance downward for its newly-acquired Tucano gold mine.

Meanwhile, Endeavour Silver announced that it will suspend operations at its El Cubo mine in Mexico after exhausting the reserves and resources at the mine, as it failed to replace them through exploration.

Both stocks are listed as sells on my rating spreadsheet, and hopefully readers have avoided both stocks.

8. Kirkland Lake Gold Earnings Report

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Former top gold stock pick Kirkland Lake Gold had yet another record-breaking quarter in Q3.

The company reported net earnings of $176.6 million, or $.84 per share, more than triple its net earnings in the prior year quarter. Free cash flow was $181.3 million, also more than triple last year, due to strong production (248,400 ounces, 38% increase), and industry-leading cash costs ($562/oz all-in sustaining costs).

At the Fosterville mine, production increased by nearly 70,000 ounces from Q3 2018, mainly due to a 75% improvement in the average grade to 41.8 g/t.

The excellent quarter was accompanied by a 50% increase in its quarterly dividend to $.06 per share. One can expect the dividend increases to continue if Kirkland Lake continues to produce such large amounts of free cash flow.

7. Franco-Nevada Delivers, Too

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Streaming and royalty behemoth Franco-Nevada (FNV) had arguably the best quarter of any gold miner, reporting records across the board: 133,219 gold equivalent ounces of production (11% increase), $235.7 million in revenue, and $101.6 million in net income, or $.54 per share.

Franco-Nevada is seeing excellent returns from a number of royalties and streams in its portfolio, including the start of deliveries from the Cobre Panama stream, which declared commercial production on September 1, 2019, one month ahead of schedule. The company stands to benefit a great deal by Kinross's planned expansion of the Tasiast mine, in which it owns a 2% royalty.

6. Lundin Produces First Gold at Fruta del Norte Mine

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Lundin Gold (OTCPK:FTMNF) has produced its first gold at the Fruta del Norte project in Ecuador. The company says it will continue to focus on completing commissioning and ramping up production on the path to commercial production in the second quarter of 2020.

Fruta del Norte was discovered by Aurelian Resources in 2006, and Lundin Gold purchased the project in 2014 for $240 million. The underground mine contains probable reserves of 5.02 million ounces of gold grading at 8.74 g/t. It's expected to average 310,000 ounces per year at sub-$600/oz all-in sustaining costs.

Sandstorm Gold (SAND) is likely also happy with this news, as it owns a .90% NSR royalty on the mine, which it acquired back in January.

5. Maverix Metals to Acquire Royalty Portfolio From Kinross

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Maverix Metals (NYSEMKT:MMX) has made a big acquisition of royalties, buying a portfolio from Kinross Gold (KGC) for $74 million. In 2018, the company also bought a royalty portfolio from Newmont.

Maverix will issue to Kinross a total of 11.2 million common shares and pay $25 million cash upon closing of the transaction, which is expected before year-end. Closing is expected to occur on or before December 31, 2019, and at which time Kinross will own a 9.4% basic interest in Maverix, joining major shareholders Newmont-Goldcorp and Pan American Silver (NASDAQ:PAAS).

While this deal is also estimated to produce $3 - $4 million in cash flow in 2020, it has significant potential to increase in the future, with development assets like a 2.5% NSR royalty on Integra Resources' DeLamar project, and a 2% NSR royalty on Gold Standard Ventures' Railroad project.

Also notable in the deal: "Kinross will provide Maverix with an opportunity to make an offer to acquire certain metal streams or metal royalties which Kinross may contemplate selling in the future." This means Maverix will have first-shot at such royalties over its peers.

4. Barrick Agrees to Sell Super Pit Mine for $750 Million

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Barrick Gold has agreed to sell its 50% stake in the Super Pit Mine for $750 million.

"The sale of our non-operating interest in KCGM represents the first step in our plan to realize in excess of $1.5 billion from the disposal of non-core assets by the end of next year," said Mark Bristow, Barrick president and chief executive officer. Proceeds from the sale will be used to further strengthen the balance sheet and invest in its other projects.

Super Pit once produced in excess of 800,000 ounces of gold per year at industry-leading cash costs before experiencing a wall pit failure. However, Newmont (50% owner) recently released strong guidance for 2020, forecasting 570,000 ounces at $1,035/oz AISC.

3. Newmont-Goldcorp Sells Red Lake Mine to Evolution Mining

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Newmont-Goldcorp has divested its Red Lake Mine, selling it to Evolution Mining for $375 million, plus an option to receive an additional $100 million tied to new resource discoveries.

Red Lake carries 7 million ounces of mineral resources and 2.1 million ounces of gold reserves. In 2018, the mine produced 276,000 ounces of gold at a $988/oz AISC.

Costs have risen this year to $1,600/oz, but Evolution says it is planning a major turnaround to get costs back below $1,000/oz.

2. Zijin Mining to Buy Continental Gold for $1.4 Billion

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Chinese gold miner Zijin Mining (OTCPK:ZIJMF) has agreed to buy Continental Gold for C$1.4 billion (US$1.1 billion) in a friendly, all-cash offer, and at a 29% premium over Continental's 20-day volume-weighted average price.

Continental's Buriticá project is expected to produce approximately 250,000 ounces of gold per year on average over a 14-year mine life, at all-in sustaining costs of US$600 per ounce. First gold pour is expected in the first half of 2020.

The deal is at a price of C$5.50 per share, and Continental shares closed at C$5.39 per share on Monday. Investors looking to lock-in gains might want to consider selling before the transaction closes, which is expected in January 2020.

1. Kirkland Lake Gold to Acquire Detour Gold

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Not surprisingly, Kirkland Lake Gold's $3.7 billion, all-share acquisition of Detour Gold takes the top spot this month.

Kirkland Lake shares initially dropped by 15% following the news, but have since rebounded, perhaps after investors realized this deal may not be that bad after all. Its CEO has commented that Detour Lake's all-in sustaining costs could fall to as low as $850/oz through optimization, and feels there is value not recognized by the market:

"When you're doing M&A, you're looking for value that other people don't see. We'll have to do some work to create the value, but we see an opportunity to create a lot of new value that's not recognized in the story yet, and the market doesn't see." - CEO Tony Makuch in Bloomberg interview.

The upside in this deal is huge Makuch delivers. Reducing costs by $100-$200 per ounce would have a massive impact on its free cash flow given the sheer size of Detour Lake. Please read my previous coverage for more thoughts on this takeover.

What top news over the past month did I miss? Let me know in the comments.

Disclosure: I am/we are long KL, SAND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.