Investors prospecting for takeover targets should dig into gold stocks.
With the price of the precious metal recently soaring to record heights, some fund managers suggest there could be a boom in takeovers of junior miners as producers choose to grow production through acquisition rather than shoulder the massive costs of building big new mines.
Merger and acquisition activity in the gold sector was slow in the first half of this year. And gold giant Barrick Gold Corp. turned heads when it decided to acquire copper producer Equinox Minerals Ltd. in a $7.3-billion all-cash deal instead of another precious-metals miner.
But the soaring price of gold in recent weeks is changing the psychology of the market, say some fund managers, and could result in a new burst of mergers and acquisitions (M&A).
"I am convinced we are going to see more [mergers]in the second half of this year," said Charles Oliver, a portfolio manager at Sprott Asset Management. "A rising gold price makes people feel good about their business and future outlook, and I think that will help propel M&A activity."
Gold stocks have not risen along with bullion, which has surged to the $1,785 (U.S.) an-ounce level, so "they are looking very attractive and cheap," Mr. Oliver said. "Is it cheaper to buy or build [a mine] Right now, I would stay it is looking very attractive to buy."
One reason that gold-mining stocks have lagged the metal's meteoric rise is that analysts expect much lower prices for gold over the next three or four years. "People don't believe that gold prices are staying up," said the fund manager, who is sticking to the prediction he made in 2008 that the price of the yellow metal will hit $2,000 an ounce by April, 2012.
Spiralling costs for raw materials ranging from steel to cement, as well as rising wages, are putting a damper on mine construction. Rather than commit to the multibillion-dollar cost of a major new project, larger gold miners are becoming more interested in acquiring smaller firms that have just built a mine or exploration companies with high-grade deposits, Mr. Oliver said.
For example, Osisko Mining Corp. , which has just begun production at its mine in Malartic, Que., and Perseus Mining Ltd. , which is nearly finished building a mine in West Africa, are two companies that could be potential takeover targets although "timing is one of those things that is hard to predict," Mr. Oliver acknowledged.
In addition to those two stocks, his fund also owns juniors such as Keegan Resources Inc. , Sandspring Resources Ltd. and Guyana Goldfields Inc. , all of which have significant resources that could be turned into mines at a cost of less than $1-billion each, he said. Extorre Gold Mines Ltd. has a high-grade deposit in Argentina that could also be attractive to a buyer, Mr. Oliver said.
Mark Serdan, a portfolio manager with BMO Asset Management Inc., agrees that larger gold players may now be more motivated to go shopping, but warns that juniors may have a "high view of what they are worth" given the metal's recent rise. "So now you enter into the possibility of hostile takeovers," he said.
But a return to stock market stability is needed to get deals done, Mr. Serdan said. "When that happens, I think you will see more [M&A] activity."
Allied Nevada Corp. is one attractive acquisition candidate, he said, noting that the company's Hycroft Mine in Nevada is in the "backyard" of players like Barrick and Newmont Mining Corp.
And Trelawney Mining and Exploration Inc. , a junior miner with a growing resource property in northern Ontario, as well as Perseus Mining and Keegan Resources with their properties in West Africa, should also be on the radar screens of the bigger players, Mr. Serdan added.
Dennis da Silva, a portfolio manager with Middlefield Capital Corp., suggested that M&A activity could be sparked by what looks like to be a creeping takeover.
Agnico-Eagle Mines Ltd. last month agreed to buy a 9.2-per-cent stake in Rubicon Minerals Corp. in a $70-million private placement. Rubicon owns the Phoenix gold project in Red Lake, Ont., a prolific gold-producing area that is home to Goldcorp Inc.'s Red Lake mine. Goldcorp "may feel threatened by this strategic investment" in their backyard, and consider making a bid, said Mr. da Silva.
Goldcorp acquired Gold Eagle Mines Ltd. in 2008 shortly after Agnico-Eagle bought a 5-per-cent stake in that junior miner, whose exploration project was next to its Red Lake operation. If Goldcorp does make a move for Rubicon, it will likely happen within the next year before the company starts trying to build its own mine, he suggested.
He, too, sees Perseus Mining as an obvious takeover candidate. "This could be a 400,000-ounce producer in the next two or three years," and could be in the eye of a company like Iamgold Corp. , which has the cash to do a deal and a beachhead in West Africa with its Essakane mine in Burkina Faso, Mr. da Silva said. "It wouldn't be a surprise if they were to acquire another development mine or an existing mine to consolidate their position there."