In the gold sector, nothing gets the sharks circling like the combination of promising mines and a depressed stock price. The sector's prolonged slump now has its biggest predators, Newmont Mining Corp. and Barrick Gold Corp., feeding on weaker rivals, creating expectation of further takeovers in an industry where many experts see consolidation as long overdue.
Denver-based Newmont snapped up former market darling Goldcorp Inc. for US$10-billion after a series of management miscues left the Vancouver-based owner of 13 properties with a valuation that trailed comparable companies. Barrick took advantage of much the same dynamics last September, striking a US$6billion deal with Randgold Resources Ltd. after investors got the jitters over the company's mines in politically unstable African countries such as Mali and the Democratic Republic of the Congo.
Who is the next potential target? That was a hot topic of conversation in investment banking circles on Monday, as analysts crunched the numbers on the takeover of Goldcorp, which was the world's most valuable gold miner just three years ago.
For major mining companies, the ideal takeover candidate holds large mineral reserves that aren't reflected in the current price of the shares.
When analysts at CIBC World Markets Corp. looked at the senior gold producers in a report on Monday, they found Goldcorp traded at a discount to peers, but the valuation gap was even larger at Yamana Gold Inc. and Kinross Gold Corp.
Yamana's stock price today is half what it was three years ago, despite restructuring efforts that include selling the Gualcamayo mine in Argentina last October.
The company has made more headlines for controversy over its executive compensation than it has for discovering gold. CIBC's mining team said in a report: "With Gualcamayo now out of the picture and more M&A in the sector, Yamana could itself become a target given its discount valuation."
Kinross executives have spent years digesting a poorly timed $7.1-billion acquisition of properties in Africa. Over the past two months, Kinross's share price is up 25 per cent. Investment bankers say in the past, Kinross has pitched takeover offers at Yamana, but the two companies have never found common ground on a deal.
At the other end of the spectrum, Agnico-Eagle Mines Ltd.
sports a stock-market valuation that's superior to the rest of the senior gold companies, and is seen as a potential acquirer if deal-making heats up.
To date, takeover activity in the gold sector has seen one large producer acquire another, in part because there are significant costcutting opportunities when big buys big. If senior mining companies start targeting the dozens of Canadian-listed mid-tier and junior gold miners, there are a number of companies that are likely to attract attention because they combine decent properties and relatively low valuations.
Detour Gold Corp. is on that list. There's been a "For Sale" sign up for months, as hedge fund Paulson & Co. tries to get a premium price for its 5.7-per-cent stake in a company with one operating mine, near Timmins, Ont. According to CIBC's data, other mid-sized gold miners with shares that trade at a discount to peers are Alamos Gold Inc., Centerra Gold Inc,, Eldorado Gold Corp., Leagold Mining Corp., Pretium Resources Inc.
and Semafo Inc.
Not everyone predicts the two big mining deals seen in the past six months will trigger more takeovers. In a report on Monday, RBC Dominion Securities analyst Stephen Walker said: "This second combination of two senior global gold producers ... could delay further M&A among senior and intermediate gold producers as companies seek to acquire noncore assets expected to be sold by Newmont-Goldcorp and new Barrick."
There are even expectations that the potential sale of properties from the two biggest players in gold mining may in turn create a new domestic champion in the sector.
Veteran mining entrepreneur Robert McEwen, former chief executive of Goldcorp, said on Monday: "I have noticed that both Barrick and Goldcorp and the combinations they have done, they have talked about divestitures. So maybe out of those divestitures will rise a new Canadian mining company or others that will take their place on the stage."
© The Globe and Mail
Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.
Discover a wealth of investment information and and exclusive features.