Gold Prices Fueling International Expansion

Although gold prices have already crested over $1900 per troy ounce this year, the traditional season of strong demand for physical gold could accelerate an already prominent trend for mergers and acquisitions for gold producers carried over unabated from last quarter. With the price of gold having appreciated significantly more than global gold equities, it is not surprising to see gold industry organizational restructuring as enhanced working capital generated from outsized profits is leveraged into even greater potential. The spot market price for gold has vaulted over 29 percent over the course of this year compared with an average of only 3.7 percent for the NYSE Arca Gold Miners Index which might serve as an average representation for gold miners, or even a decline of 7.4 percent for the NYSE Arca Junior Gold Miners Index which might serve as an average representation for junior gold mining producers and exploration companies.

Emerging trend continuation

Building upon the common theme in the resources sector identified earlier with consolidation in the industry, the mid-tier gold miner AuRico Gold Inc. (NYSE:AUQ) announced a $1.46-billion offer to buy Northgate Minerals Corp. (TSX:NGX), which eliminates a prior merger bid between Northgate and Primero Mining Corp. (TSX:P). The response in the market has been muted with AuRico share prices declining 11.3 percent on the news. AuRico is offering 0.365 of an AuRico share for each Northgate share reflecting a 45 percent premium to Northgate shareholders. Aversion to the deal for AuRico investors implies that the market believes the acquisition will dilute AuRico shareholder value via the premium.

At stake

Northgate is a gold and copper producer with some international exposure to operations, development and exploration properties in Canada, Australia and the United States. The flagship asset is seen as the Young-Davidson advanced stage mining project located in Northern Ontario expected to be productive next year. It is anticipated that the mine will produce over 2.5 million ounces of gold over an estimated 15 year life span of operations.

Northgate operates the Kemess mine, an underground project in northern British Columbia which produced 100,790 troy ounces of gold last year. Other assets would include two Australian assets with one underground gold mine employing recovery through a solution based leaching process and one combination open pit and underground mine with a different gold recovery method through an alternative leaching process. The combined Australian properties totaled approximately 171,923 troy ounces of gold.

Gold production output from the combined enterprise could be more than 730,000 ounces, which might compare with Centerra Gold and arguably provide exposure to more favorable mining jurisdictions. The transaction would additionally provide a larger resource base and also offer geographical diversification for AuRico to obtain a foothold on assets in Canada and Australia.

Analysts are divided

Among the analyst community there does not seem to be a clear consensus view on the transaction which may serve notice to investors that this might in fact be as fairly priced as it should be according to the current material information available at this time.

One cautious analyst from Canaccord Genuity, Wendell Zerb has maintained a “hold” rating, recognizing that this venture would face increased operational expenses but noting that an unquantifiable benefit might be the experienced management group to lead development of a challenging portfolio.

Moving forward

On Tuesday, Joe Conway the Chief Executive Officer for Primero Mining was interviewed on BNN, following his disappointing news of the AuRico offer. Offering tempered optimism Conway explained “Since April, gold prices have done pretty well over the past 4 months. The junior developers have done something but there hasn’t been a significant amount of share price appreciation, which typically they need to get to the next level of their company. They need to raise more money at a higher price and build the projects that they have. That really hasn’t translated and so the opportunities may still be there.”

In addition to other acquisition opportunities, the company is also looking at negotiating a new tax agreement between Mexico, Barbados and Canada for the export of unprocessed silver which is taxed at current spot market prices. Although the negotiations appear to be more than a minimum of one year from being realized, a success could mean an additional $40 million of positive cash flow. Alternatively, Conway disclosed that the company is considering a hedging strategy which would have an effect of locking in revenues and minimizing the risk of a potential spike in the spot market price of silver.

Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.