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It became plain that the mining
sector was on the edge of the much anticipated consolidation as suggested by
comments at the 2008 Denver Gold Forum (Mining Sector
Ripe for Consolidation Following Recent Corrections). The recent acquisitions announced by Kinross Gold Corporation (KGC) and IAMGOLD
Corporation (IAG)
provide a model for accretive transactions, a value metric for potential
take-over prospects in the current market, and possibly signal the beginning
of a succession of value creating business combinations. Especially with the
valuation disparity in the current market between development stage companies
and producing companies, the values must be compelling for potential
consolidation by the producers.
Kinross, Teck Cominco, and Anglo American on
Lobo-Marte
Kinross
recently entered into agreements with Teck Cominco (TCK) and
Anglo American plc (AAUK) to
purchase their respective shares of the Lobo-Marte
gold project in northern Chile
for an approximate price of US$250 million. As Teck
and Anglo hold 60% and 40% of Lobo-Marte,
respectively, and it may be a challenging project to develop, it seems to be
a good choice for divestiture. From Kinross’s perspective it appears to
be a good fit.
Lobo-Marte while located in a remote area of Chile at high
elevation is situated between Kinross’s Maricunga
and La Coipa mines. The project is within trucking
distance to the La Coipa mill for processing and
development of Lobo-Marte would benefit from close
proximity to Kinross’s organization and personnel. The Lobo-Marte
project has a total gold resource of about 5.9 million ounces of gold (5.4
million ounces of Indicated gold resource and 0.5 million ounces of Inferred
gold resource). This would imply for projects under development, well
situated to other projects (in remote areas), located in politically stable
jurisdictions, may sell for $46 per ounce price for
Indicated resources.
IAMGOLD and Orezone on Essakane
IAMGOLD
announced the acquisition of Orezone Resources Inc. (OZN) to
maintain the development of the Essakane project in Burkina Faso
for approximately US$139 million. Orezone moved up 282% on the day to close
at $0.44 per share. Significantly IAMGOLD also moved up on the news
reflecting investor support for the transaction. The Essakane project is
fully permitted and will require an additional $350 million to construct,
IAMGOLD is expected to have cash and resources to secure project financing to
allow the project to move into production by 2012.
The
Essakane project appears to be a good fit for IAMGOLD which has ample
experience in West Africa. Essakane has a
gold resource of 3.1 million ounces classified as reserves at a US$600 gold
price. IAMGOLD anticipates acquisition of Orezone will add annual production
of 300,000 ounces
of gold annually and reduce its average cash cost by $40 to $50 per ounce. Based
on reserve ounces alone, the Orezone transaction equates to about $45 per
share and appears to reflect a slightly lower value owing to the higher
geo-political risk.
Barrick and NovaGold on Donlin Creek
We noted
with interest the large percentage move in NovaGold Resources Inc. (NG) on
Thursday with the announcement of the acquisition of Orezone Resources at
nearly a 300% premium to the previous day's close. NovaGold is one of our top
value picks for its potential revaluation as they either address their short
term funding issues or become the target of acquisition by one of the top 5
gold producers. By comparison with either the Kinross or IAMGOLD acquisitions
NovaGold is valued today at less than $4 per ounce of their nearly 22 million
ounce Measured and Indicated gold resource.
We have
followed with interest Barrick Gold Corporation (ABX) and
NovaGold’s progress in their 50-50 joint venture at Donlin Creek in Alaska. Barrick and
NovaGold anticipate completion of a Feasibility Study next quarter on the
Donlin Creek project which could advance much of the 32 million ounces of
in-pit Measured and Indicated gold resources into the reserve category. Barrick
has expended significant resources to advance the project over the past
several years and at over 1 million ounces per year of potential production,
Donlin Creek clearly is one of the largest potential producers owned by a
junior mining company. Though NovaGold has other significant assets, their
50% share of the Donlin Creek project alone, at $45 per ounce, would suggest
a takeover price of NovaGold of over $6.00 per share.
The
Kinross and IAMGOLD transactions are an indication that producers are
starting to move on the opportunities presented by the dramatic fall in the
share prices of quality development stage companies with large in the ground
resources. Historically acquisition values have been closer to the $100-150
per ounce level, but due to recent market conditions, we fully expect to see
other M&A announcements in coming weeks by producers trying to capitalize
on the value opportunities presented in the gold sector.
Disclosure: The author is long NG. An affiliate of
the author's employer provides corporate advisory services to NG.
Mike Niehuser
Beacon Rock Research.com
Mike Niehuser
is the founder of Beacon Rock Research, LLC which produces research for an
institutional audience and focuses on precious, base and industrial metals,
and substitutes, oil and gas, alternative energy, as well as communications
and human resources. Mr. Niehuser was nominated to BrainstormNW magazine's list of the region's top
financial professionals in 2007.
Mr. Niehuser was previously a senior equity analyst with the
Robins Group where he was a generalist and focused on special situations.
Previously he was an equity analyst with The RedChip
Review where he initially followed bank stocks but expanded to a diverse
industry range from heavy industry to Internet and technology companies.
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