It became plain that the mining sector was on the edge of the much anticipated consolidation as suggested by comments at the 2008 Denver Gold Forum (Mining Sector Ripe for Consolidation Following Recent Corrections). The recent acquisitions announced by Kinross Gold Corporation (KGC) and IAMGOLD Corporation (IAG) provide a model for accretive transactions, a value metric for potential take-over prospects in the current market, and possibly signal the beginning of a succession of value creating business combinations. Especially with the valuation disparity in the current market between development stage companies and producing companies, the values must be compelling for potential consolidation by the producers.
Kinross, Teck Cominco, and Anglo American on Lobo-Marte
Kinross recently entered into agreements with Teck Cominco (TCK) and Anglo American plc (AAUK) to purchase their respective shares of the Lobo-Marte gold project in northern Chile for an approximate price of US$250 million. As Teck and Anglo hold 60% and 40% of Lobo-Marte, respectively, and it may be a challenging project to develop, it seems to be a good choice for divestiture. From Kinross’s perspective it appears to be a good fit.
Lobo-Marte while located in a remote area of Chile at high elevation is situated between Kinross’s Maricunga and La Coipa mines. The project is within trucking distance to the La Coipa mill for processing and development of Lobo-Marte would benefit from close proximity to Kinross’s organization and personnel. The Lobo-Marte project has a total gold resource of about 5.9 million ounces of gold (5.4 million ounces of Indicated gold resource and 0.5 million ounces of Inferred gold resource). This would imply for projects under development, well situated to other projects (in remote areas), located in politically stable jurisdictions, may sell for $46 per ounce price for Indicated resources.
IAMGOLD and Orezone on Essakane
IAMGOLD announced the acquisition of Orezone Resources Inc. (OZN) to maintain the development of the Essakane project in Burkina Faso for approximately US$139 million. Orezone moved up 282% on the day to close at $0.44 per share. Significantly IAMGOLD also moved up on the news reflecting investor support for the transaction. The Essakane project is fully permitted and will require an additional $350 million to construct, IAMGOLD is expected to have cash and resources to secure project financing to allow the project to move into production by 2012.
The Essakane project appears to be a good fit for IAMGOLD which has ample experience in West Africa. Essakane has a gold resource of 3.1 million ounces classified as reserves at a US$600 gold price. IAMGOLD anticipates acquisition of Orezone will add annual production of 300,000 ounces of gold annually and reduce its average cash cost by $40 to $50 per ounce. Based on reserve ounces alone, the Orezone transaction equates to about $45 per share and appears to reflect a slightly lower value owing to the higher geo-political risk.
Barrick and NovaGold on Donlin Creek
We noted with interest the large percentage move in NovaGold Resources Inc. (NG) on Thursday with the announcement of the acquisition of Orezone Resources at nearly a 300% premium to the previous day's close. NovaGold is one of our top value picks for its potential revaluation as they either address their short term funding issues or become the target of acquisition by one of the top 5 gold producers. By comparison with either the Kinross or IAMGOLD acquisitions NovaGold is valued today at less than $4 per ounce of their nearly 22 million ounce Measured and Indicated gold resource.
We have followed with interest Barrick Gold Corporation (ABX) and NovaGold’s progress in their 50-50 joint venture at Donlin Creek in Alaska. Barrick and NovaGold anticipate completion of a Feasibility Study next quarter on the Donlin Creek project which could advance much of the 32 million ounces of in-pit Measured and Indicated gold resources into the reserve category. Barrick has expended significant resources to advance the project over the past several years and at over 1 million ounces per year of potential production, Donlin Creek clearly is one of the largest potential producers owned by a junior mining company. Though NovaGold has other significant assets, their 50% share of the Donlin Creek project alone, at $45 per ounce, would suggest a takeover price of NovaGold of over $6.00 per share.
The Kinross and IAMGOLD transactions are an indication that producers are starting to move on the opportunities presented by the dramatic fall in the share prices of quality development stage companies with large in the ground resources. Historically acquisition values have been closer to the $100-150 per ounce level, but due to recent market conditions, we fully expect to see other M&A announcements in coming weeks by producers trying to capitalize on the value opportunities presented in the gold sector.
Disclosure: The author is long NG. An affiliate of the author's employer provides corporate advisory services to NG.