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Junior gold miners are appealing takeover targets as bullion prices climb
By Dominique Gene and Andrew Willis
The Globe and Mail, Toronto
Monday, November 4, 2024
https://www.theglobeandmail.com/business/article-junior-gold-miners-are-...
For the mining crowd, the annual Denver Gold Forum is a chance to swap speculation on potential deals. At this year's gathering in September, all the takeover talk revolved around junior companies with promising properties being snapped up by larger rivals.
The country's smallest gold miners -- those developing projects that are years away from producing bullion -- are becoming attractive takeover targets. Soaring gold prices have boosted the valuations of senior and intermediate mining companies and left them flush with cash, while stock prices continue to languish at exploration companies.
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After hosting a series of meetings and dinners at this year's Denver conference, mining analyst Tanya Jakusconek at Bank of Nova Scotia said in a report: "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."
The price of gold soared 37% over the past year, closing Friday at US$2,736 an ounce. Last week investment bank Goldman Sachs predicted the rally will continue and the price will hit US$3,000 an ounce next year.
Takeover activity in the mining sector is picking up, with 125 deals announced in Canada in the second quarter of the year, up 34% from the previous three-month period, according to investment bank Crosbie & Co. The value of mining M&A in the most recent quarter jumped to $964 million from $328 million in the prior quarter.
So far this year, large and mid-sized mining companies focused on acquiring one another, not picking off junior companies with projects that will take years to produce gold. In a report last week, analysts at RBC Capital Markets predicted that the dynamic is about to change, as senior miners begin taking advantage of a rising tide that has only lifted a few boats.
"We think rising producer margins could start to encourage activity to backfill asset portfolios, especially if access to early-stage capital remains limited," the RBC analysts said.
The investment bank tracked more than 100 junior mining companies, and its top stock picks based on the quality of their projects, rather than takeover potential, are Artemis Gold, Skeena Resources Ltd., and Seabridge Gold.
Brian Graves, a mergers and acquisitions lawyer at law firm Fasken, said takeover activity picked up at established producers, but not at junior companies, in part because mining executives want to see more evidence that higher bullion prices are here to stay before committing capital to projects years away from producing gold.
The higher spot gold price offers immediate benefits for senior companies that are in production, whereas the value of junior companies, which are still in the exploration or development stages, tend to be more influenced by long-term gold price forecasts, Mr. Graves said.
"There may be a concern amongst potential acquirers that the price isn't sustainable," he said, adding that management teams at established producers fear overpaying for projects, which they have been guilty of doing in the past.
At the 2017 Denver forum, executives at New York-based hedge fund Paulson & Co., led by long-time gold bull John Paulson, lambasted gold producers for wasting billions of dollars on value-destroying mergers and acquisitions.
M&A activity at junior miners is also being held back because the companies' executives and boards are often reluctant to engage in takeover talks with their stock prices at relatively low valuations, Mr. Graves said. He said the management mindset at most exploration companies is to maintain control, keep raising capital, and try to reap the rewards that come from bringing a mine into production.
Juniors have found a way to bridge the gap between financings and M&A through joint ventures, Mr. Graves said. There's an uptick in these ventures, which allows junior companies to stay involved in their assets without giving them up entirely, which they would have to do in an M&A deal.
On the other hand, senior companies can make strategic investments without fully committing to a particular junior company, Mr. Graves said.
For potential acquirers, pouncing on a junior company in the preliminary stages of launching a mine is typically the best way to make money. In a report published last month, analysts Ovais Habib and Eric Winmill at Scotiabank looked at 17 mines built over the past decade and concluded that senior mining companies "can achieve a better value proposition by pursuing earlier-stage rather than later-stage development projects when looking to make an acquisition."
"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 Scotiabank analysts said.
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