M&A Activity Is Picking Up in Gold Mining Sector

Source: http://www.flickr.com/photos/investingingold/

I am very bullish on the gold mining sector. Not only am I bullish on the price of gold, but the shares of many of these companies have fallen precipitously over the past couple of years, and this has created several excellent value opportunities. Evidently I’m not the only one who believes there is good value in the gold mining sector: Recently, we have seen a handful of acquisitions among gold miners. Here are a few examples.

Most recently, Goldcorp (NYSE:GG) made a C$2.6 billion bid for Osisko Mining. Goldcorp — one of the largest gold miners — decided that there is value in Osisko Mining, which owns and operates the massive Canadian Malartic mine in Quebec. The mine already produces 400,000 ounces annually, and it is expected to increase production to as much as 600,000 ounces for at least 15 years. As production increases, costs are coming down, with cash costs per ton of ore mined coming down 15 percent over the past year. In addition to Canadian Malartic, the company owns the Hammond Reef exploration stage project.

Unfortunately, Osisko took a $530 million write down related to this property, as lower gold prices forced the company to stop its development. But those investors expecting higher gold prices can also expect Hammond Reef to go forward at a later date. The property has more than 7 million ounces of gold, and it should add several hundred thousand ounces of production annually for several years once production begins.

The deal has not yet been approved, but investors should note that as I write this, Osisko Mining is trading with a market capitalization of C$2.75 billion, which is C$150 million more than Goldcorp’s offer.

On December 16, Primero Mining (NYSE:PPP) offered to buy Brigus Gold (AMEX:BRD) for about $220 million worth of stock. Brigus Gold owns the Black Fox mining complex, which will produce as much as 120,000 ounces of gold for six to seven years. The deal gives Primero diversification into Canada — before, all of its operations were in Mexico.

While I have expressed skepticism that this deal could interfere with the company’s prior expansion plans — should the gold price remain weak — I believe that the deal is accretive for Primero shareholders given the number of ounces Brigus has in the ground and given its production potential. Given this prima facie conflict, I am hesitant to give management the benefit of the doubt, but at the same time I suspect management saw so much value in Brigus shares as to warrant taking such a risk.

A day later, Asanko Gold (AMEX:AKG) agreed to purchase PMI Gold in an all-stock deal. Of the deals I discuss here, this one is my favorite because it is uniquely strategic. The two companies’ flagship properties — Esaase and Obotan — are right next to each other in Ghana, and as a result, the two projects can share infrastructure.

Furthermore, Esaase is scheduled to go into production at the time that Obotan is scheduled to be developed. Therefore the cash flow from Esaase can be used to fund the development of Obotan. The end result of this acquisition is that Asanko will be able to grow production from nil to 380,000 ounces without having to raise capital in a manner that penalizes shareholders.

We have seen several other deals as well if we go back further or look at smaller companies.

  • Gogold Resources purchased Animas Resoruces’ San Gertrudis mine. After this, Marlin Gold made a takeout offer for Animas, which Gogold topped shortly thereafter. Animas owns a large land package in Mexico with more than 500,000 ounces of gold on the San Gertrudis property.
  • Teranga Gold purchased Oromin Explorations in a deal initiated in June. The deal creates one of the largest west African gold mining companies with a huge land package and potentially more than 250,000 ounces of annual gold production — not bad for a company with just a $160 million valuation.
  • In May, New Gold (AMEX:NGD) purchased Rainy River Resources, which owns the large Rainy River development project. The Rainy River project will produce 300,000 ounces of gold annually once it goes into production. This should provide the company with sufficient cash flow to develop its enormous Blackwater project, which means that over the long term, New Gold will be fast-growing company.

All of these deals suggest to me that there is value in the gold mining sector, and that there are probably more acquisitions to come. With prices low, now is the time to take advantage. If you want to own shares in the next take-out target, then look for companies that have mines with long lives and low production costs. Also look for situations where a company might purchase the company who owns the mine next door (e.g. Asanko Gold and PMI Gold).

Disclosure: Ben is long shares of Goldcorp, New Gold, Asanko Gold, and GoGold Resources.

Don’t Miss: Let’s Talk About Gold Leasing

More Articles About:   , , , ,  

More from The Cheat Sheet