Interesting read to all:
Most important numbers lie not in the resource count but in the project economics.
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 10 deals were in the gold sector, the first half of 2011 has seen only one of the top 10 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 that had M&A plans. Two deals involving gold stocks were announced late September; let’s have a look.
On September 19, Agnico-Eagle (TSX: T.AEM, Stock Forum) announced a C$255-million (US$257.8-million) acquisition of Grayd Resources (TSX: V.GYD, Stock Forum), 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 (TSX: V.TKK, Stock Forum) will acquire all of the outstanding shares of GoldQuest Mining (TSX: V.GQC, Stock Forum). 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.
