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In the first half of 2011, gold mergers and
acquisitions (M&A) were fewer and further between. PricewaterhouseCoopers
reports in its mid-2011 mining deals update:
Entities with a primary interest in gold were still
the most sought after targets by volume in 2011 representing 31.4% of deal
volume, though the value of gold transactions dropped to 12.8% in 2011 from
31% in 2010. In comparison to 2010 where three of the top ten deals were in
the gold sector, the first half of 2011 has seen only one of the top ten
deals in the gold sector. (Newmont Mining Corp.’s $2.21 billion
acquisition of Fronteer Gold Inc.)
It wasn’t surprising to see M&A activity in the gold sector
slowing as the gold price was racing upward and junior companies got
expensive. Things changed in September. As gold was sliding from its
historical non-inflation-adjusted highs, shares of junior mining companies
dropped sharply. The TSX-V, where most of these companies trade, fell by
25.5% within the same month that gold lost about 15%.
Weakness of this magnitude did not go unnoticed – not only by
investors but by companies which had M&A plans. Two deals involving gold
stocks were announced late September; let’s have a look.
On September 19, Agnico-Eagle (T.AEM) announced a C$255-million
(US$257.8-million) acquisition of Grayd Resources
(V.GYD), a gold exploration company with its flagship La India project
located 70 kilometers from Agnico’s Pinos Altos mine in Mexico.
The project is not huge – at 0.5 g/t Au cutoff it hosts 665,000
ounces of gold at 1.03 g/t Au in the Indicated category and 418,000 ounces at
0.96 g/t Au Inferred. The company’s mine scenario envisions
92,000-ounce/year production over nine years by the relatively cheap heap
leaching method.
The most important numbers, however, lie not in the resource count but
in the project economics: At a very conservative US$950 per ounce gold and a
5% discount rate, the project’s NPV is US$187 million and an internal
rate of return (IRR) is 51%. Cash cost per ounce is moderate at US$507. These
excellent figures – in a project basically located next door in a
stable mining jurisdiction – resulted in the high premium Agnico is willing to pay for Grayd:
65.7%. GYD shares leapt accordingly, a big win for shareholders.
That week another deal started taking shape, this time in the form of
a merger. As part of the arrangement, Takara Resources (V.TKK) will acquire
all of the outstanding shares of GoldQuest Mining
(V.GQC). The companies market the transaction as a “no-premium”
merger, not giving an estimate of the value of the combined entity.
Neither of the two companies is a producer; both are explorers. The
purpose of the merger is to develop two properties with open-pit mining
potential – one owned by GoldQuest (La Escandalosa) and the other by Takara (Tassawini)
– to production stage together under a single operating team.
La Escandalosa is located in Dominican
Republic, a relatively mining friendly jurisdiction. The project hosts a
NI43-101 compliant Inferred resource of 405,000 ounces (4,863,000 tonnes at 2.6 g/t Au). A preliminary economic assessment
is planned for the fourth quarter of 2011, so there are no NPV or IRR data to
rely on. There is, however, some information on the project’s
metallurgy: Preliminary testing showed 98% gold recovery. GoldQuest
also mentions that the property is located 17 kilometers from a main road and
has hydroelectric potential.
Tassawini is quite
different. It is located in Guyana on the site of a past producing mine. From
1907 to 1914, about 11,200 ounces of gold were recovered at Tassawini, which hosts an Indicated resource (at 0.5 g/t
Au cutoff) of 437,000 ounces at an average grade of 1.3 g/t Au with an
addition of an Inferred resource of 62,000 ounces at 1.0 g/t Au. Although
Takara mentions “an in-house scoping study” that lay ground for
further preliminary engineering activities at Tassawini,
the company hasn’t published any economic numbers yet.
This transaction seems full of uncertainties. It looks like a
risk-reducing move on part of both companies, which have small projects with
uncertain economics that are unlikely to interest any major companies any
time soon. Perhaps so, but they are in different countries, where workers
speak different languages, and requiring different technical and political
skills. We’re not surprised, then, that neither of these companies saw
their share prices rise as a result of the merger announcement.
In other words, it seems likely that as both metals and junior mining
companies correct – which may continue for some time –
we’ll see more mergers and acquisitions, but not all deals are created
equal. Buyer beware.
[Shifting trends worldwide can
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