Low gold miner M&A shows signs of missed opportunity
M&A in the gold space has fallen significantly in the first half of this year but some believe that now is the time to be buying.

Author: Alex Williams
Posted: Tuesday , 16 Jul 2013

Mining executives seem to be in consensus that it is now cheaper to buy gold production than to build it. “It's an ideal market to pick assets up and build a mid-tier gold company,” said John McGloin, chairman of Amara Mining, following the publication of a feasibility study for its Baomahun project in Sierra Leone.
The sentiment has been repeated by many, but more often as an excuse for not building production, or for slashing exploration budgets, than for making acquisitions. Mergers and acquisitions have slackened to a painful degree: according to accountancy firm KPMG, mining deal flow in the first quarter of 2013 totalled $15bn (including streaming agreements and asset sales), versus $90bn in the first quarter of last year.
In situ valuations are meanwhile at marked lows. Australia's Newcrest, which has reserves of 87m gold ounces, trades at less than $96 per ounce. Barrick Gold, the world's largest gold miner by output, has reserves of 140m gold ounces and a market capitalisation below $15bn, leaving it on a similar ratio.
In the pre-production space, discounts are even steeper. ASX-listed gold explorer ABM Resources, which is valued at A$95m ($85m), sits on 3.5m ounces in Australia's Northern Territory, giving it an in situ valuation of $24 per ounce. ASX-peer Papillon Resources, which aims to advance its 3.1m ounce Fekola gold project in Mali, is valued at a slightly loftier A$287m ($260m).
"What happens with majors is they buy everything at the peak and sell it at the bottom,” said resources billionaire Lukas Lundin in a recent interview. “It happens over and over.” The herd mentality of corporates offers big rewards to those with the discipline to build up cash in rising markets, ready to deploy it when prices are cheapest, the restraint of the one being punitive without the conviction of the other.
Acquisitions in the gold mining market however this year over the $50m mark are few enough to mention. On Friday, Alamos Gold bid C$69m ($66m) for Toronto-listed peer Esperanza Resources, which boasts 1.5m gold ounces in Mexico, plus 16m ounces of silver. Earlier this year, Alamos was outbid for Quebec-focused Aurizon Mines by USlisted Hecla Mining, which paid roughly $750m in cash and shares.
Agnico-Eagle Mines has meanwhile followed a so-called “toehold” buying strategy, spending $66m on close to 10% equity stakes in ATAC Resources, Sulliden Gold, Kootenay Silver and Probe Mines. “We actually see this as a time where we should be active,” Agnico's president Sean Boyd said. “Opportunities are presenting themselves to us.”
Alamos' acquisition of Esperanza seems equally opportunistic. Whilst its friendly offer of C$0.85 per share is a 38% premium to its prior price, it is a 37% discount to the level of shares at the beginning of the year. “We have followed Esperanza's progress for some time,” said Alamos chief executive John McCluskey, “and see this as a truly compelling opportunity for our shareholders.” Pending closure, the deal is expected to add 100,000 ounces per annum to production at Alamos, with all-in sustaining costs below $900 per ounce.
Agnico, Alamos and Hecla are therefore amongst a small number of companies to date who have sought to capitalise on weak gold mining markets, rather than suffer by them. London-listed Randgold Resources' chief executive Mark Bristow has likewise been quoted as saying that those who buy into the current environment will emerge as the cycle's winners: in Mali, Randgold has struck an earn-in agreement with privately-owned Taurus Gold, following a similar deal with Kilo Goldmines late last year in the Democratic Republic of Congo. That acquisitions should seize up when valuations are lowest is perverse but not surprising: equity and debt markets are cyclical and are the engines behind acquisitions, as well as production growth. Those companies that can buck the trend however, via internally financed growth, are those that stand to both buck the cycle and benefit from it.