Survey the mining industry, and you'll find all the senior metal producers hold minority stakes in exploration companies.
In fishing terms, think of these holdings as baited hooks, trailed out on a trolling line. If the line starts twitching, it means there's a potential lunker to be reeled in.
Investors who play junior mining stocks can take their cues from the senior companies, and back exploration plays that feature significant minority shareholders, in hopes of being taken out.
The challenge in this strategy is timing. Ideally, outsiders want to hold the juniors when the seniors decided to pull in their catch, by tabling premium-priced takeover. Of late, there's been very little of this takeover traffic, as 2008 and the early stages of 2009 saw a well-documented combination of weak credit markets and uncertainty in commodity prices weigh heavily on mining stocks.
But a takeover announced last week by gold play Agnico-Eagle Mines shows the combination of stronger financing markets and soaring metal prices have the seniors starting to reel in deals.
Agnico-Eagle announced a friendly, $720-million takeover bid for Comaplex Resources late Thursday, an offer that's meant to give Agnico full control of a gold property called Meliadine, located in Nunavut, in the Canadian Arctic. Agnico-Eagle already has a large mine in the same region. (As part of the transaction, Comaplex's other holdings will be spun out as a new exploration play.)
This deal is expected to succeed, as Agnico-Eagle has a 12 per cent stake in Comaplex, established back in July, 2008 - so this hook went out almost two years ago. Agnico-Eagle also won support from the target company's largest shareholder, Perfora Investments, which holds another 18 per cent.
The takeover was pitched at a 27-per-cent premium to where Comaplex stock was trading, which analysts described as "fully priced." In other words, Comaplex's board got decent terms. Less than a year ago, Comaplex sold shares for $4.25 each in a bought deal led by BMO Nesbitt Burns. The takeover values the stock at $9.15. While no one is shocked by the deal, analysts were surprised that Agnico-Eagle moved sooner, rather than later.
Add this takeover to the consolidation theme that was behind the recent merger of copper plays Quadra Mining and FNX Mining Co., and it's clear that deal-making is back in vogue among mining companies.
What junior mining company might be next to attract an offer?
Well, there has been no lack of trolling by the senior companies. Goldcorp, for example, is a serial acquirer and has no less than 20 joint ventures and partnerships with junior companies listed on its web site. One relationship to watch: Goldcorp is a minority investor in Osisko Mining, which owns a promising Quebec property, and showing signs of becoming a legitimate intermediate operator in its own right.