Coming into 2015 and the first month of this year, the resource industry was abuzz with fresh hopes that the price environment was now changing for the better. Two big acquisitions also laid renewed hopes in resurgence in M&A activity. Those headline-capturing acquisitions were Goldcorp Inc.’s (NYSE:GG) half-billion-dollar acquisition of Canada’s Probe Mines in January of this year and Tahoe Resources’ (NYSE:TAHO) billion dollar purchase of Rio Alto Mining a month later.
Prices of the two major metals – copper and gold – have slipped from their highs earlier this year. But, this has not stopped analysts from predicting that 2015 will still see increased merger activity.
There are several reasons for this. One, as intelligently commented on by a recent SilverSeek article, due to the challenging price environment, over the past several years many majors have cut their exploration budgets, in some cases by as much as 75%. That means that majors are at risk of losing product and essentially mining themselves out of business. As a result, we have major miners that are hungry for new supply, which they can get from buying up attractive, well-managed junior mining companies.
Also a factor into the equation is that due to the price climate, junior mining companies are cheap and make for very attractive acquisition prospects.
The question is, which mining companies are the attractive ones? And what makes them so attractive for acquisition?
Answering this question means returning to what many majors need – more resource to replenish their diminishing supplies. So that means that shovel-ready companies are the ones that will be ripe for the picking.
The traditional 3-million-ounce threshold for acquisition is out the window – it’s now quality and grade of product over quantity.
Toronto-based mining consultant Randy Reichert of NW3 Mining Consultants, Inc. has been providing analysis recently on M&A expectations this year. Reichert happens to support the importance of quality of asset over quantity: “Mining companies that have high-grade product, that have low CAPEX and little debt and that operate in politically stable countries – those are the companies that majors will be increasingly targeting … Major mining companies want to have as few roadblocks as possible blocking from production. Companies that have high debt or are in early stages of development will probably be skipped over…”.
Randy Reichert adds, “In certain parts of the world, water rights and a mine’s ability to have ready access to water will also play a key role.”
Lower development and production costs and increased efficiency are especially critical for miners as the challenging price environment continues.
Small things, seemingly anodyne at first glance, add up. Things like unchecked or unnecessary consultant expenses or misplaced equipment can make a significant impact on a junior mining company’s bottom line and its competitiveness in the industry.
Over the long-term, a mining company’s focus on the wrong type of ore bodies can also risk their competitiveness in the industry.
“Gerald Whittle of Whittle Consulting makes a very poignant point,” says Reichert. “He says that mines should be considered money mines and not gold mines or copper mines or some other precious metal … Mining mangers that can focus on profit, rather than focusing on mining as much metal as possible, will succeed.”
To return to mergers and acquisitions, one company that’s been much discussed as being the next big target is Exeter Resource Corp. (NYSEMKT:XRA), a Canadian gold miner that operates the Caspiche Project in Chile. One of the reasons why the company is such a high-profile M&A candidate is because it fulfills every criterion now important to majors.
Exeter owns its Caspiche mine. The company has over $30 million in the bank and no debt. The Caspiche mine in Chile is also no slouch, offering a resource of 37.9 million ounces of gold. This makes the company very attractive for major bids.
The Caspiche mine also has a high yield of oxide gold resources, roughly 1.7 million ounces over a ten-year timeline. Although it’s of modest grade, what makes it attractive is that the gold is shallow enough in the mine to allow for low mining and processing cost. Modest grade but low production cost is a boon for any major company searching for a takeover prospect.
“The fundamentals of Exeter Resources does make it a very attractive acquisition potential,” adds Randy Reichert. “But, what I like most is the current management at the company. Based on past performance, Exeter management understands how to run an efficient, cost-conscious company. Moreover, having sold Extorre Gold Mines several years ago, they understand what it takes to facilitate a successful merger and acquisition in the current market.”