Mining M&A Heats Up: Does 3 Deals Make a Trend?

The last week of September and the first week of October brought three major deals in the precious metals space, with the biggest by far being the US$18.3-billion tie up of Barrick Gold (TSX:ABX,NYSE:ABX) and Randgold Resources (LSE:RRL).

That merger came the same day as Great Panther Silver’s (TSX:GPR,NYSEAMERICAN:GPL) acquisition of Beadell Resources (ASX:BDR) and was followed closely by Americas Silver’s (TSX:USA,NYSEAMERICAN:USAS) purchase of Pershing Gold (TSX:PGLC,NASDAQ:PGLC).

The onslaught of M&A activity has investors wondering if more could be in store — and the general consensus from market watchers seems to be “yes.”

“It’s funny, there’s been three deals in a week and we haven’t had three deals all year,” Darren Blasutti, president and CEO of Americas Silver, said after his company’s news hit the market.

“I think you’re going to see a lot more intermediates buying juniors and more juniors getting together,” he continued. “[There are] two concepts here: one of them is people have to replace their reserves and resources because they haven’t really been drilling … or they’ve been mining their highest-grade material to try and stay cashflow positive.”

The second is that “there are just too many single-asset companies, and single-asset companies are very inefficient.” For example, he said, single-asset companies “spend $4 to $5 million just being a company — being on the stock exchange, having auditors, all of that kind of stuff.”

He sees more M&A activity coming down the pipe as companies try to combat that problem — “I don’t think you’ll see a lot of big, big deals … but I think you’re going to see another three, four, five, six deals that are going to be at the intermediate level.”

Blasutti’s first point is a problem many in the gold space have identified. Speaking at the recent Denver Gold Forum, during which the Barrick/Randgold deal was announced, Charles Cooper of Metals Focus said that major miners have been losing market share to “the intermediate sector and junior miners.”

He also anticipates further M&A in the sector down the road. “For the gold industry as a whole I think it is a shot in the arm that the industry needs,” he said. “It’s showing that M&A can happen and it can happen in a way where you have a shakeup of an old-style, massive company like Barrick Gold.”

The idea that single-asset companies are the ones that will engage in M&A activity has been voiced by Gabelli Gold Fund analyst Chris Mancini as well. Also speaking at the Denver Gold Forum, he commented, “the market’s just taking any opportunity to slam the stock of a company that’s a single-asset company which doesn’t meet its guidance.”

Mancini added, “even if it’s something that happened for a couple of days during a quarter, the market forecasts that out for the rest of the mine life. And so I think that it is somewhat likely that if the gold price stays here you could see single-asset companies combining to … mitigate that [risk].”

Of course, said Blasutti, in order for further business combinations to be well received it will be important for companies to secure arrangements that make sense.

“The reception of our deal has been good, the reception of the Barrick deal’s been good. The reception of the Great Panther deal’s been good,” he said. “You haven’t seen stocks go down 20 percent on announcement … I think that bodes well for getting transactions done as long as they make sense. If the market understands why you’re doing it, I think it’s a good time to be doing them.”

With metals prices low and stocks down, that type of engagement with investors has been a key topic of discussion in the precious metals space this year. When asked whether he sees recent M&A activity increasing interest in the industry, Blasutti said it’s only one part of the picture.

In his opinion, to be successful companies will need to make smart decisions — about M&A or otherwise — that show market participants they will be able to make money if they invest. And of course, it would help if gold and silver prices improved.

For his part, he’s fairly optimistic on both counts. “I think the industry’s come a long way from its big spending in the late 2000s and early 2010, 2011 … people are much more focused on being good stewards of shareholders’ capital, and certainly we focus on that every day.” 

Looking at prices, he sees silver as the metal with more upside. “I don’t think we have a silver market at $14.50 or $14.75. There’s very few primary silver companies that can make any money at that kind of price,” he said. Conversely, “at $1,200 gold people can make money.”

Blasutti continued, “the industry needs a higher price for silver, whereas with gold you can still find projects that can make really good returns. So I think silver’s got more upside than gold — but ultimately we’ve got to buy projects that can make money at today’s prices, so that’s what we’ve done.”

On the whole it remains to be seen whether M&A activity continues and whether it stokes greater interest in the precious metals space. For now, hopes remain high, and all eyes are on the deals that have already been made — especially the one between Barrick and Randgold.

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

Editorial Disclosure: Great Panther Silver is a client of the Investing News Network. This article is not paid-for content.

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