Mexico’s proposed higher mining royalties could block nearly $7bn in investments
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Steve Todoruk joined Sprott Global Resource Investments Ltd. as an Investment Executive in 2003. He focuses on investing in new discoveries – companies that have identified promising deposits that may prove to be economic. As long as the discovery grows, the company’s share price often grows with it.
When a deposit gets big enough, a major mining company may seek to acquire the company, paying a healthy takeover premium to shareholders. The takeover battle for Osisko, which we talked about yesterday, shows that big mining companies will fight tooth and nail to get their hands on a big new ore body. Goldcorp fought hard with Agnico Eagle and Yamana for control of Osisko’s Malartic gold deposit.
Goldcorp lost the battle, but is garnering lots of attention today for another acquisition – which it made successfully.
Steve says that there are the two key stages in a small mining company where acquisitions like these are most likely. See Steve’s recent note below.
In 2004, a small company called Virginia Gold Mines Inc. discovered the Eleonore gold deposit in Quebec. They successfully drilled and grew the discovery, and found a total of 4 million ounces of gold at high grades. In 2006, Goldcorp paid $420 million1 to Virginia to acquire this high-quality discovery. Since then, Goldcorp has been busy building this new mine, aiming for initial production in late 20142.
That deadline is coming close. Goldcorp has posted a great educational video walking us through the lengthy process of mine design and construction. I recommend you watch the video to see how a reputable major mining company goes about building a new mine the right way.
This is a happy ending to the gold discovery Virginia Gold Mines Inc. made ten years ago. Assuming all goes as planned, the Eleonore gold mine may provide many years of steady gold production and revenue generation.
The Eleonore deposit and the Osisko battle illustrate two models adopted by major miners to increase annual gold production. With the first method, which was employed at Eleonore, a major takes over a junior once the discovery appears to be large enough, but before any work to construct a mine has commenced. The big miner then designs and executes a mine plan itself to extract the ore.
In the second method, illustrated by the Osisko takeover, a major miner attempts to acquire a deposit after a smaller company has built the mine. By then, the small company has de-risked the project, eliminating any uncertainty of whether the deposit could become an actual mine.
At Osisko’s Malartic mine, Goldcorp waited several years for Osisko to successfully extract ore, and then made a takeover bid for a mine that was already in production. Goldcorp could have tried to take over Osisko several years earlier, for much less money. But for a variety of reasons, they let Osisko build and start production from the Malartic mine before making an offer. Ultimately, Goldcorp was happy to offer more for a less risky asset. This is quite common in almost any business – not just in the mining industry.
Most takeovers occur at one of two important stages in an exploration story, illustrated by the Eleonore and the Osisko development stories. In the first instance, major mining companies may take over a junior once it has delineated a large deposit with good grade.
If no takeover occurs, the smaller company will most likely set out to build the mine itself. Expect the junior’s share price to soften up at this stage. At some point during this process, or, as with Osisko, after production has begun, a bigger company may take them over.
In the end, if the junior has a high-quality asset, a takeover should occur that rewards shareholders with a healthy premium.
P.S.: Steve recently created an education video on investing in natural resource discoveries. Click here to watch.
Steve Todoruk worked as a field geologist for major and junior mining exploration companies after he graduated with a B. Sc. in Geology from the University of British Columbia, in 1985. Steve joined Sprott Global Resource Investments Ltd. in 2003 as a Senior Investment Executive. To contact Steve, e-mail him at [email protected] or call him at 1.800.477.7853.
By Henry Bonner
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