Latin America Heats Up Gold M&A Action


"With gold prices vaulting to new highs, major miners are armed with strong balance sheets."

In the wake of the pending $3.6 billion dollar buyout of the gold junior Andean Resources (TSX: AND), expansion-minded major mining companies are poised to gobble up more asset-rich gold explorers. So says the dominant U.S. investment banker, Bank of America Merrill Lynch (BofAML), in a September research report entitled Global Gold M&A Heats Up.

"For the balance of 2010, we expect the reserve-hungry senior and mid-tier producers to continue focusing their attention on resource-rich junior producers and developers," says the report's Toronto-based lead mining analyst, Michael Jalonen (who was hailed by Forbes magazine in 2008 as one of the best in the business).

With gold prices vaulting to new highs, major gold miners are now armed with strong balance sheets, Jalonen notes. And the race is on to ramp-up their production figures to continue to cash in on a secular bull market in gold prices. But that's not proving easy.

In spite of bullion's spot price more than quadrupling since its lows of eight years ago, these deep-pocketed gold miners have found themselves scrambling to replenish dwindling inventories. Their daunting challenge now is to finally buck a global decade-long trend of falling output numbers, which have been consistently dropping at around 5% per annum. So cashed-up gold producers are starting to aggressively target takeover candidates with undeveloped multi-million ounce discoveries, rather than merely relying on organic growth.

"By our count, the top ten gold producers under coverage will need to replace 38 million ounces (Moz.) gold reserves mined in 2010," Jalonen adds. "We estimate the biggest gold companies could generate $80 billion of free cash flow over the 2010–2015 period that could be deployed for acquisitions."

"This trend bodes well for other companies with world class development projects." Not the least of which is Exeter Resource Corp. (NYSE.A:XRA; TSX:XRC; Fkft:EXB), which tops BofAML's list of the ripest plums among the ranks of aspiring gold miners.

Big league investment industry firms ordinarily prohibit their analysts from speaking directly with the media, and that includes BofAML. But the reasons it favors Exeter so much are obvious, according to several research analysts and fund managers with other investment firms that BNW News spoke with.

They point to the fact that Exeter owns by far the largest undeveloped gold discovery in Latin America in recent years—the Caspiche deposit. Weighing in at 21.3 Moz. in the highly reliable measured and indicated (M&I) category, it sits at the heart of northern Chile's prolific Maricunga gold belt. (A further 5.1 Moz. gold have been outlined in the less-definitive inferred category).

Only the nearby Cerro Casale gold mine-in-the-making edges Caspiche as the biggest of all of South America's emerging gold mines and deposits. Jointly owned by global mining powerhouses, Barrick Gold (TSX:ABX; NYSE:ABX) and Kinross Gold Corp. (TSX:K; NYSE:KGC), it hosts 26.4 Moz. gold reserves. (Both deposits also host world-class copper resources).

According to Mutual Fund Managers Marshall Berol and Malcolm Gissen, the "bigger the better" is typically the mantra of major miners when sizing up takeover opportunities. And that makes Exeter a standout candidate, in their opinion. Berol and Gissen manage the San Francisco-based Encompass Fund, which has a heavy weighting in mining equities and which has been a stellar performer over the past couple of years as a result of a resurgent market in gold stocks.

"It's increasingly difficult to find large gold discoveries. There aren't many left anywhere in the world," Berol says. "So the few junior gold developers with world-class finds, like Exeter Resource, are going to be increasingly attractive takeover targets for large miners."

"Caspiche is located among a cluster of lucrative gold mines in one of the world's most lustrous mineral belts, where more than 100 Moz. gold have been discovered to date. And the fact that the region has ample mining infrastructure already in place adds to Caspiche's allure for major miners," Berol added.

The Maricunga gold belt also offers another key geopolitical advantage to a spectrum of prospective mid-sized to major gold-hungry suitors that are reported to be circling overhead. Specifically, Chile is a politically stable democracy that has long been mining-friendly, especially as this capital-intensive industry is essentially the backbone of its economy.

"The big players in the area in close proximity to Exeter Resource are Barrick Gold, Goldcorp Inc. (NYSE:GG; TSX:G) and Kinross Gold," says Berol. In particular, Barrick and Kinross own most of the Maricunga gold camp's prized assets. They include the two nearby mines that straddle Caspiche on each side, one of which is Cerro Casale.

Notably, Barrick recently completed a buyout of a 75% stake of Cerro Casale earlier this year for the princely sum of $1.28 billion. The deal included the acquisition of another gold junior, Arizona Star Resource, which was instrumental in the discovery and development of this monster deposit.

However, Goldcorp—the world's fifth largest gold producer and second biggest in terms of market capitalization—also now owns a lucrative piece of the action in Maricunga. Earlier this year, Goldcorp dramatically outmaneuvered Barrick by snatching up New Gold Inc.'s (TSX: NGD (NYSE.AMEX:NGD) 30% stake in the in-development El Morre gold deposit. And that development suggests there are now at least three major mining companies that likely have Caspiche within their crosshairs, according to one Canadian mining analyst who was willing to speak with BNW News on condition of anonymity.

"It's more likely that you'll have interest from someone who already has a geographical focus there," he says. "And it's no secret that Caspiche would fall into a takeover scenario because of the size and grade of the asset. And, of course, its location is important. It sits right between two mining operations owned by Kinross and Barrick. Also, the El Morro deposit, in which Goldcorp has a stake, is a little bit further to the south."

This assessment appears to be shared by BofAML, with Jalonen noting in his "Global Gold M&A Heats Up" research report: "We believe the senior gold producers will be focusing on. . .reviewing potential synergies in regions with adjacent operations and acquiring development project companies with multimillion-ounce deposits."

Other asset-rich gold development juniors that BofAML identified as prospective takeover candidates are include, in descending order of their attractiveness to would-be suitors, in BofAML's opinion: Osisko Mining (TSX:OSK), Chesapeake Gold (TSX.V:CKG), Detour Gold Corporation (TSX:DGC), Rubicon Minerals Corp. (NYSE.A:RBY; TSX:RMX), International Tower Hill Mines (TSX:ITH; NYSE.A:TSM), SanGold (TSX:SGR), Queenston Mining Inc. (TSX:QMI), Fronteer Gold (TSX:FRG; NYSE.A:FRG) and Andina Minerals (TSX:ADM).

Of all the other gold juniors in politically stable, pro-mining Latin America nations, only two currently have discoveries at or above a 10-Moz. threshold. One is Andina Minerals, which owns the Volcan deposit in Chile's Maricunga gold corridor. It weighs in at about 10 Moz. Then there's Greystar Resources (TSX:GSL), with at least 11.55 Moz. gold at its Angostura project in northern Columbia.

As an aside to this article, there were no fewer than +1,100 meetings involving the movers and shakers of the gold mining industry and high finance in Denver last month at the gold mining industry's prestigious annual conference hosted by the Denver Gold Group. And the flurry of enthusiastic deal making on display will surely translate into more headline-grabbing corporate takeovers as the gold market powers its way into 2011.

Marc Davis

DISCLOSURE: The principals of BNW News and Top 40 Gold Stocks do not directly or indirectly own shares in any of the companies mentioned in this article.

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