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investing in mining

In the wake of major top-end changes, there is potential for further merger and acquisition activity among mid-tier miners

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Shares of Agnico Eagle Mines, whose operations include the Meliadine gold development project in Nunavut, have fallen over the past 30 months. But it is a company ‘to keep on eye on because they have a good growth strategy and a number of mines coming on stream,’ one observer says.Agnico Eagle

The ongoing megadeals in Canada’s gold mining sector signal better days for the country’s mining industry as a whole, industry expert Dean Braunsteiner says.

Nearly a decade of slumping commodity prices have pushed miners to slash debt and lower costs to peak efficiency, says Mr. Braunsteiner, national mining leader with global accounting firm PricewaterhouseCooper in Toronto.

“Mining companies are starting to realize that they have cut as much of the cost as they can and the next step is to bring assets and companies together. What the industry really needed was a couple of the big players to start,” he says.

Mr. Braunsteiner expects smaller miners with leaner balance sheets to begin linking in 2019.

“I think the time is right now for the mid-tier to look at doing something similar. They’ve been given a blessing to go ahead and start those acquisitions because the majors are doing it.”

One mid-tier gold producer he says has the potential to fill the void as an iconic Canadian mining giant in the next five years is Agnico Eagle Mines Ltd. From August of 2016 to early January of 2019, Agnico shares have fallen in tandem with gold prices; both have lost 33 per cent of their value.

“I think Agnico would be one to keep an eye on because they have a good growth strategy and a number of mines coming on stream,” he says.

Another company Mr. Braunsteiner feels is well positioned for a mining recovery is Lundin Mining Corp., which produces base metals including copper, zinc, lead and nickel. From November of 2017 to early January of 2019, Lundin shares have fallen by 45 per cent.

“Lundin certainly has quite a large amount of cash and is looking to deploy it in terms of investments. They will be on the hunt for something as well,” he says.

While the drive to trim balance sheets has created a new generation of low-cost producers, Mr. Braunsteiner says it has also diverted the mining industry from what it actually does: exploration and mining.

“The side effect of cleaning up the balance sheet is there has been under-investment in exploration. The real struggle companies are going to be facing over the next couple of years is where the next big project is going to come from.”

Growing demand has most metals prices creeping up, but he says the lull in production could provide a further price boost for the metals still in the ground.

“It may bode well for commodity prices if it becomes a supply constraint,” he says.

Bob Thompson, vice-president and portfolio manager at Raymond James in Vancouver, agrees that falling production and higher commodity prices will spur further merger and acquisition activity in the mining sector.

“We will start to see commodity prices rise because companies have cut their assets and haven’t put any money in the ground, and the supply starts to drop,” he says. “When the supply drops they panic to take out other producers and prices go up.”

As a result, Mr. Thompson sees investment opportunity in mining stocks. To back up his claim he turns to a standard industry indicator referred to as a mining clock, where six o’clock signals a boom and 12 o’clock a bust.

According to the mining clock, he says one o’clock corresponds with the start of the period between 2012 and 2015 when miners with bloated balance sheets faced tumbling commodity prices. By two o’clock companies such as Glencore PLC and Teck Resources Ltd. struggled to stave off bankruptcy.

“Balance sheets were tested and that’s when you got companies that either go bankrupt or have to start shedding their assets heavily,” he says.

By four on the mining clock, commodity prices stabilized, and that’s when the trimming trend began in 2015.

“Most of the companies brought down their costs, shed assets, got rid of bloated management teams and were cash-flow positive,” he says.

Mr. Thompson says the recent stock mega-deals involving Barrick Gold Corp. occurred at about four on the mining clock. As the clock progresses, he says more cash deals will occur as mid-tier miners either merge or get swallowed.

So, what is the right time to buy? He says between four o’clock and eight o’clock, and right now it’s 6:30 in the cycle.

“We’re right in the middle of the great time to buy for mining stocks,” he says.

By the time the mining clock strikes eight, he says big institutional investors will bid stock prices up and cash deals will be replaced by stock deals.

“You can take overvalued stock and buy someone else’s overvalued stock,” he says. “When you start to see paper takeovers, that usually tells you you’re getting a frothy market.”

As valuations on mining stocks get frothier, he says big institutional investors will cash out.

“Three or four years from now when everybody knows we are in a bull market, and say mining is the place to be, we will probably be at 10 o’clock.”

As is the case with most bull markets, he says smaller retail investors will be the last to know the bear has risen.

“Eleven o’clock is when retail investors come in,” he says. “At 12 o’clock the government says, ‘There’s a lot of money to be made in the mining sector, let’s raise taxes.’ ”

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