Merger and acquisitions (M&A) are an important component of applying an evaluation to gold exploration companies, as they have no revenue and possibly no published resource. What a mining company is willing to pay for perceived ounces of gold or other metals in the ground, provides investors a benchmark for the potential value they could achieve by investing in junior gold exploration companies. This concept also applies when a producing mining company acquires another producing miner but with the added element of generated revenue to add to the valuation.
In 2022, the mining sector had 1,402 M&A deals worth US$75 billion, a decline of 34% in value from 2021. Gold was the largest component of M&A activity, with 444 transactions worth US$39 billion.1 This clearly shows that gold is still one of the hottest commodities and mining companies are actively looking for ways to replenish their depleting sources of gold production, as shown in the examples below.
A standout acquisition of a junior gold exploration company announced in December 2021 and completed in February 2022 was Kinross Gold’s purchase of Great Bear Mining. Kinross paid a 43% premium above the 20-day volume weighted trading price of Great Bear’s shares, acquiring the company for US$1.8 billion. The project is located in Red Lake, Ontario and is comprised of 9,140 hectares. At the time of the acquisition, it did not have a published resource but Kinross would have done its due diligence on drilling results to estimate how many ounces of gold could be in the ground. In February of this year, an initial resource of 5 million ounces (Moz) was published on the Great Bear project which means Kinross paid US$360 per ounce of gold in the ground, this number could be reduced when they publish an updated resource in the future.
For comparison’s sake, Osisko Mining has a market capitalization of C$1.62 billion. Their current resources on the Windfall project located in the Abitibi Greenstone Belt, James Bay region of Québec, are 7.4 Moz of gold at an average grade of 11.4 g/t Au, mainly in the indicated and inferred category. The gold grades are in the top 10 globally for projects. A feasibility study on the project published in 2022 using a US$1,600 gold price reveals an after-tax net present value (NPV) of C$1.2 billion, after-tax internal rate of return (IRR) of 34% and a two-year payback. They are expecting to achieve C$257 million average annual after-tax free cash flow per full year of production for $6.2 billion in gross revenue. They have nine drill rigs on site focused on expansion and infill drilling. As of June 2022, when they published their maiden resource, the company had drilled 1,852,861 metres. Could this company be a takeover candidate considering how advanced the project is, the high-grade gold, and the positive economics on the project?
This leads to the possibility of another acquisition of a gold exploration company, Amex Exploration. The company has drilled over 375,000 metres on its Perron project located in the Greenstone Belt, Québec and reported assay results showing multiple high-grade gold zones. The project is surrounded by producing gold mines, providing the possibility of trucking the ore to a nearby mill to save capital on building one. Amex Exploration has analyst coverage from five securities firms based in Canada, who estimate the future published resource of Amex could be between 3-5 Moz of gold. Taking the estimate of 4 Moz of gold in the ground, at a current market capitalization of US$157.9 million, this puts a value of US$39/oz on the company, making Amex Exploration an attractive target for a gold mining company in the area. More information can be found on their website https://www.amexexploration.com/
An example of an earn-in type of acquisition is Vanstar Mining’s option agreement with IAMGOLD on the Nelligan Project in Québec. In the terms of the agreement made in 2014, IAMGOLD had the option to earn 80%, initially by spending $4 million on gold exploration over four years to earn 50%. IAMGOLD then took the option to increase their stake to 75% in 2019 when they published an initial 3.2 Moz gold resource by paying Vanstar $225,000 over 3.5 years and delivering a pre-feasibility study by the end of the term. The upside is Vanstar does not have to spend any money to get this project into production. The resource was upgraded in February of this year to 5.6 Moz of gold (1.99 Moz indicated + 3.6 Moz inferred). Based on Vanstar’s 25% interest (1,375,000 oz of gold in the ground) and the current market capitalization of US$16 million, the entire company is valued at only US$11.63 per ounce of gold. To find out more about this undervalued company, check out their website https://vanstarmining.com/
Moving on to one of the bigger transactions in the M&A space, the end of 2022 saw the proposed arrangement with Yamana Gold being acquired by Pan American Silver and the sale of their Canadian assets going to Agnico Eagle. Shareholders of Yamana approved the arrangement on January 31, 2023. Yamana shareholders received US$1.0406 in cash and 0.0376 common shares from Agnico Eagle, and 0.1598 common shares from Pan American. In total, it was a US$4.8 billion takeover of Yamana. The deal was a 23% premium to Yamana’s closing price of US$4.08 on November 3, 2022.
In February of this year, Newcrest Mining announced a non-binding offer from Newmont Corporation to acquire 100% of their shares by issuing 0.380 Newmont shares per Newcrest shares. The combination would result in the combined company being 30% owned by Newcrest and 70% owned by Newmont. The proposal represents a 21% premium to Newcrest’s closing price of US$22.45 per share on February 3, 2023. The proposal has been rejected by the board of Newcrest stating it did not represent sufficient value for their shareholders. It remains to be seen if Newmont will increase its offer or if another suitor will step up to the plate. Stay tuned.
Acquisitions for smaller market capitalized gold exploration companies are usually offered at higher premiums. An example is Catalysts Metal Ltd.’s offer to acquire Superior Gold for a 62% premium above the closing price of February 22, 2023. Under the terms of the arrangement, common shareholders of Superior will receive 0.3571 shares of Catalyst, the exchange ratio represents the equivalent of C$0.44 per Superior share, which represents an equity value of C$54 million. The transaction is expected to be completed in Q2, 2023. Superior owns the operating Plutonic Gold mine in Western Australia which has a 5.9 Moz resource and 3 Mt per annum processing capacity with annual production of 62,000-65,000 oz of gold. Their reserves and resources were 630,000 oz of contained gold, 1.9 Moz of gold measured and indicated and 3.97 Moz of inferred resources.
An even larger 95% premium was paid by Alamos Gold to acquire all the shares of Manitou Gold Inc., based on their respective closing share prices of February 27, 2023. Alamos already owned 19% of Manitou Gold shares. Alamos will issue approximately 1 million shares for a total cost of C$14 million to develop district-scale targeting and exploration for the area surrounding Alamos’ Island Gold mine in Ontario, Canada. Alamos has discovered 4 Moz of high-grade gold through near-mine drilling around the Island Gold mine. Manitou Gold was a strategic low-cost junior gold exploration acquisition for them, tripling their land package along strike on the relatively underexplored Michipicoten Greenstone Belt. Manitou does not have a published resource. Investing in gold bullion, it would take 14 years to get a 95% premium on your investment based on today's gold price.
B2 Gold has offered a 45% premium to the February 10, 2023 closing share price of Sabina Gold and Silver. Under the terms, B2 Gold will issue 0.3867 common shares for each Sabina share held for consideration of C$1.87 per share, implying a total equity value for Sabina of C$1.1 billion. The rationale for acquiring Sabina is they have a fully permitted, construction ready gold project in Nunavut, Canada. A feasibility on the Goose Project shows a 15-year life of mine, producing an average 223,000 oz of gold per year.
This is the first foray into Canada for B2 Gold as their projects are in Africa and the Philippines. A Canadian acquisition for B2 Gold means enhanced operational and geographic diversification of an advanced development asset in a tier-1 mining jurisdiction. Considering the Philippines and certain countries in Africa are ranked some of the most challenging places for mining on a political and socio-economic basis, it is not surprising that B2 Gold has made a move to Canada.
It is essential to look at the best mining jurisdictions in the world as more companies are looking to make acquisitions in more stable and mining friendly areas of the world. The Fraser Institute publishes an annual survey of mining and exploration companies to rank provinces, states and countries on policy factors that may encourage or discourage mining investment. According to their 2021 survey, Western Australia moved to the top of the Investment Attractiveness Index, Saskatchewan came in second, other provinces in Canada in the top 10 were Québec and Alberta. The least attractive countries were Venezuela, Philippines, Zimbabwe, DRC, Mali, Bolivia, Kyrgyzstan and Mongolia. The survey for 2022 has not yet been published.
Canada is an attractive jurisdiction for mining companies to have operations and therefore make project acquisitions. Gold is Canada’s most mined mineral; gold exports in 2021 were valued at $21.3 billion. Canada is the world’s fourth largest producer of gold, producing 220 tonnes in 2022; twice the amount produced in 2012 and an increase of 25% compared to 2020. In 2021, Ontario and Québec produced 70% of the gold mined in Canada. The largest operating gold mine in Canada is the Malartic Mine in Québec.
The tax regime in Québec is very favourable for explorers and producing mines. Energy costs are the lowest of any province in the country. Québec has great infrastructure, a workforce with mining and exploration knowledge. The Québec government has instituted Plan Nord to develop the natural resources extraction sector to the north of the 49th parallel. This plan is expected to generate C$80 billion in energy, mining, and forestry investments. Since 2006, private investment in Northern Québec has risen by 15.9% a year, as against only 0.9% for Québec as a whole, mainly as a result of investments made in the mining sector2. In 2021, investment expenditures in the Québec mining sector rose 55% to C$4.2 billion. Exploration and deposit appraisal accounted for C$990 million, of which gold accounted for 71.5%, for a total of C$708 million3. As of 2019, Québec had approximately 30 mines and 158 exploration projects.
Considering the mergers and acquisitions occurring in Québec, this province in Canada has the potential to see a lot more in the future.
Author: Bonnie Hughes