Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
As gold prices continue to rebound, a flurry of recent mergers and acquisitions (M&A) have breathed new life into a deflated global mining industry.
One of the recent headline-grabbing deals saw the Vancouver-based mining giant Goldcorp Inc. (TSX: G) (NYSE: GG) kick off the new year with a bang by scooping up a Canadian gold development junior, Probe Mines, for the princely sum of $526 million in an all-stock arrangement.
What is particularly interesting about this acquisition is that it reflects a new reality: When buying gold deposits, multinational mining companies are now choosing the quality of the asset over the size of the metal inventory in the ground.
In other words, it doesn’t matter that Probe’s two-million-ounce-plus deposit near Chapleau, Ontario is less than half the size of the 3-million-ounce minimum threshold that big-league miners traditionally seek out. What does matter is that it is a high-grade deposit that promises to be relatively cheap to mine at a modest capital cost.
What is key is that the deposit is relatively close to the mill that processes ore from Goldcorp’s proximal Porcupine mine in Timmins. So projected capex (mine construction) costs promise to be substantially less than if such regional infrastructure was not already available. Hence, this is a consolidation of assets in a secure jurisdiction where Goldcorp has a decades-long commitment.
To put this paradigm shift into perspective, the world’s dominant gold miners are placing an overriding emphasis on significantly reducing their capital and operating costs. And the key to doing this is to acquire new assets that are complementary to their existing mines and inexpensive to develop relative to greenfields operations.
Mining analysts — who have been mostly starved of good news over the past several years — like what they see in this new approach. They include Toronto-based Barry Allan of Mackie Research Capital.
“It feels like we are in a new gold market. This means we should see a lift on other gold assets if they are also well-located and high quality,” he says in response to Probe’s big buy-out.
Jim Mustard, a fellow mining analyst and vice president of investment, mining and banking at Vancouver-based PI Financial, also weighs-in on all the M&A buzz in a recent interview with Resource World magazine.
“The majority of M&A activity is focused on gold and copper projects,” he says. Grade is king now. Anything that can be sold as shovel-ready, and that is in a jurisdiction with clear permitting protocols, that is not subject to being derailed, and that has low to modest capital expenditures, will be sold.”
He adds that investors can profit handsomely by identifying other junior mining companies that are ripe for the picking. The following criteria, he suggests, are what investors should be looking for: “Pick only high quality assets and companies that are able to either raise capital or have sufficient funds now to both advance projects and cover general and overhead expenses for a period of time.”
Sounds like Exeter Resource? Several other analysts point to Exeter (TSX: XRC) (NYSE-MKT: XRA) as a good example of such a company. It has over $30 million in the bank, no debt, and benefits from a successful management team that sold another of its gold/silver exploration companies, Extorre Gold Mines, to mining heavyweight Yamana Gold for $414 million in 2012.
Most importantly, Exeter owns by far the largest undeveloped gold discovery in Latin America in recent years – the sprawling Caspiche gold-copper deposit in Chile – which hosts a massive resource of 37.9 million ounces of gold ‘equivalent’ ounces. (The ‘equivalent’ term refers to its combined gold, silver and copper content).
What the mining industry is yet to acknowledge is the viability of developing the Caspiche oxide resources first, to yield 1.7 million ounces of gold over a ten-year horizon.Oxide gold deposits don’t have to be high grade – none are. They work because they are typically shallow enough for the mining and processing costs to be very low. This compensates for the modest grades.
Much of the near-surface oxide cap’s likely appeal is the fact that Exeter reports that it can be mined for the projected low cash cost of $589 an ounce of gold. By comparison, most of the world’s major miners are paying upwards of $1,000 an ounce to extract gold, which makes for perilously low profit margins.
Logistically, Caspiche’s oxide cap can be mined by way of heap leaching (a relatively inexpensive and uncomplicated process that involves surface mining, then using dilute cyanide solution to separate gold and silver from the host rock). An average of 148,000 ounces of gold equivalent per annum is expected to be mined this way for the first five years, and 122,000 ounces a year beyond that.
This leaves the massive underlying gold-copper ore body as the optionality factor. In terms of the big picture, if the combined oxide andsulphide resources were developed,a projected average of 344,000 ounces per annum of production has been modelled over an anticipated 42-year mine. One must be mindful of the fact that the deeper and far more plentiful sulphide-based ore will be more expensive to develop and mine.
Caspiche’s appeal to prospective suitors is further sweetened by the fact that it is located within a cluster of gold mines in one of the world’s most prolific mineral belts (where over 100 million ounces of gold have been discovered to date). Hence, the region has significant mining infrastructure already in place, which translates into the potential for additional cost savings. For instance, the nearest operating heap leach gold mine is Kinross’ Maricunga Mine, only 16 kilometres north of Caspiche.
The Maricunga gold belt offers a key geopolitical advantage to a spectrum of mid-sized to large prospective suitors. Specifically, Chile is a politically stable democracy that has long been mining-friendly, especially since this capital-intensive industry remains the backbone of the economy.
All told, Caspiche represents a rich vein of opportunity for supply-hungry gold producers, regardless of whether bullion prices continue to trend upwards. What matters most is that this monster deposit offers a very scalable production profile – one that promises generous production at a low cost. And that is the key dynamic that makes Exeter a prospective takeover candidate.
By Marc Davis, www.BNWnews.ca
The principals of www.BNWnews.ca do not directly or indirectly own shares in any of the companies mentioned in this article.
