Rising gold prices spark a wave of M&A as major miners eye juniors with high-potential projects
The annual Denver Gold Forum, held in September, served as a gathering for the mining industry to discuss potential deals, particularly involving junior mining companies.
According to The Globe and Mail, discussions this year centred on larger companies eyeing juniors with promising properties as acquisition targets.
Small gold miners, focused on projects far from producing bullion, are becoming attractive due to soaring gold prices that have increased valuations for senior and intermediate companies while stock prices at exploration companies remain low.
Tanya Jakusconek, a mining analyst at Bank of Nova Scotia, reported increased merger and acquisition interest targeting smaller companies, particularly juniors in key mining areas, due to their low valuations and limited capital access.
“The M&A chatter this year was focused on taking out smaller-sized companies, including juniors in key mining camps, given the depressed valuations and limited access to capital,” Jakusconek said after holding several meetings during the Denver conference.
Gold’s price has surged 37 percent over the past year, reaching US$2,736 an ounce last Friday. Goldman Sachs predicts this upward trend will continue, forecasting gold to hit US$3,000 an ounce next year.
Reflecting this price surge, M&A activity in Canada’s mining sector is on the rise, with 125 deals announced in the second quarter—up 34 percent from the previous quarter—valued at $964m, according to Crosbie & Co.
While major and mid-sized mining firms have primarily targeted each other this year, RBC Capital Markets analysts foresee a shift towards acquiring juniors.
RBC analysts noted, “We think rising producer margins could start to encourage activity to backfill asset portfolios, especially if access to early-stage capital remains limited.”
RBC has identified over 100 junior companies, highlighting Artemis Gold Inc., Skeena Resources Ltd., and Seabridge Gold Inc. based on project quality rather than takeover potential.
However, some obstacles remain.
Brian Graves, an M&A lawyer at Fasken, explained that although established producers have seen an uptick in takeover activity, junior miners have not.
Executives at these companies are cautious, wanting confirmation that high bullion prices will persist before investing in long-term projects.
Graves observed that the higher spot price of gold benefits senior companies already in production, whereas junior companies’ valuations are more sensitive to long-term gold price forecasts.
“There may be a concern amongst potential acquirers that the price isn’t sustainable,” Graves noted, adding that management teams are wary of overpaying, a mistake made in past acquisitions.
During the 2017 Denver Gold Forum, John Paulson, head of New York-based hedge fund Paulson & Co., criticized gold producers for squandering billions on value-destroying M&A deals.
Junior mining companies are also hesitant to engage in M&A talks given their low stock valuations. Graves explained that exploration companies’ management often prefers to retain control, continue capital raising, and aim for rewards from advancing their projects.
To fill the gap between financing and acquisition, juniors increasingly turn to joint ventures. These ventures enable junior companies to retain an interest in their assets without surrendering full control, while senior companies can invest strategically without a full commitment.
For senior companies, acquiring a junior in the early stages of a mine’s development offers a significant financial advantage.
Scotiabank analysts Ovais Habib and Eric Winmill reviewed 17 mines constructed over the past decade, concluding that senior firms achieve better value by investing in earlier-stage projects rather than waiting until projects near production.
“For corporates looking to expand their growth pipeline and acquire a new project, that project will get considerably more expensive as it gets closer to production,” the analysts noted.
