The Gold Industry M&A Wave is Here
Is this confirmation of a trend? Canadian precious metals miner Primero Mining announced yesterday it was acquiring fellow junior miner Brigus Gold in a $220 million stock-swap deal that creates a new, intermediate-level gold producer with operations in Canada and Mexico.
Under the agreement, Brigus stockholders will receive 0.175 shares of Primero for every share of Brigus stock they own now, along with an additional 0.1 shares in a new spun-off company that will hold Brigus' interests in its Canadian Goldfields project and the Ixhuatan and Huizopa projects in Mexico.
Brigus sustained a series of miscues at its Black Fox project in Ontario that it only started to right earlier this year, with new drilling this summer indicating resources in several gold-bearing zones increased to 507,400 ounces. Production there is expected to hit 95,000-105,000 ounces of gold, at a cash cost between $650 and $700 per ounce.
By joining the two companies, Primero will provide the financial resources to further develop and expand the Black Fox mine while also advancing the adjacent Grey Fox project. At the same time it intends to develop Brigus' Cerro del Gallo project in Mexico.
Prior to the merger announcement, shares of Brigus had traded 40% below their 52-week high as shares came under pressure from low gold prices. Shares of Primero, which were already off some 30% from their highs, slumped lower on the takeover news.
Yet this deal shows the mergers and acquisitions wave that's been anticipated in the gold industry is not only coming, but is here and growing. Its not one that includes major miners like Barrick Gold or Newmont Mining , but rather the juniors and intermediates taking advantage of lower valuations to bolster their portfolios ahead of a recovery.
Barrick, already heavily laden with some $15 billion worth of debt and facing a need to conserve scarce resources, has put projects like Pascua-Lama in Chile on the shelf and cut back on capital spending as it attempts to realign its business. Newmont's Congo project in Peru is on hiatus and it sold its Midas mine and related ore facilities to Klondex Mines earlier this month.
During the run-up in pricing of gold and other precious metals and commodities, miners too often assumed a growth-at-any-cost posture regardless of the quality of the assets they were acquiring. With the collapse in pricing, they've found themselves in a tight space and have had to sell off assets or defer spending on them until some distant time in the future. The latest twist is they've also had to cut or eliminate their dividend payouts.
The smaller miners, however, may not feel the same constraints. While the depressed value of precious metals makes it difficult to raise the equity necessary for drilling and project development, tapping into M&A still gives them a way to grow. Exploration companies that possess promising claims could be particularly attractive targets.
There has been an uptick in such deals this year, with B2Gold buying CGA Mining and Volta Resources, Alamos Gold acquiring Esperanza Resources and Orsa Ventures -- following the failed bid to get Aurizon Mines, which was subsequently acquired by Hecla Mining -- and New Gold buying Rainy River Resources back in May.
Indeed, the tough pricing environment may make M&A the preferred route these companies take because it has created such an attractive valuation market. Yet there are also risks, as the projects that will be picked up will be much more prospective, so the potential for deals to go awry mounts.
But as we've seen with the results from Barrick and others, size and available resources don't automatically guarantee success, and being closer to the ground, these smaller shops are likely to be more choosy in those they intend to pursue.
The long-term outlook for gold remains strong, in my opinion, despite the current weakness. Investors who go looking among the better-positioned junior miners are apt to find a few real gems ready to pad their portfolios with timely acquisitions.
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