The Toronto conference of the Prosecutors and Developers Association of Canada (PDAC) gave investors and analysts a chance to discuss the M&A surge among major gold companies and its potential effect on the smaller gold stocks this week.
Even though the initial $18bn hostile bid by Barrick for rival Newmont - which aims to create the world’s largest gold mining group - is not necessarily regarded as viable in itself, there was a clear consensus that the explosion in corporate activity and the media attention it has brought are both good for gold stocks right across the range.
Sprott founder and investor’s favourite Rick Rule led the cheers, telling Kitco News: “I’m delighted by the broader trend for M&A in mining. Whether or not the [Barrick] bid was good is of course another matter, but the industry needs consolidation.”
Rule highlighted two reasons why gold stocks will benefit from corporate activity: larger and more liquid companies trade at higher multiples and can reduce the cost of capital; and they will divest unwanted assets to smaller companies who can better optimise them.
“Small companies could triple or quadruple value based on these assets - or even people - that are redundant at Newmont or Barrick,” he said. He added that the industry’s biggest sin over the last few decades was its ratio of administrative expense compared to cash generation.
The need for administrative efficiencies and a capital injection into the sector in general was also picked up upon by Brent Cook and Joe Mazumdar of Exploration Insights.
Mazumdar said that while mid-tier gold stocks should benefit from picking up divested assets from the mega-mergers, junior gold miners would be best to partner with these big companies in a mutually beneficial arrangement that would see the new giants provide the funds - and a convenient exit for investors.
Cook added: “If you are a junior working a project on your own, you had better have a good idea early on of how your concept is going to work, what the economics will be if it’s successful, and who is going to buy it.” But he added that majors needed these junior miners in order to make up the shortfall in production that was now building in many metals.
“We are not finding nearly enough new deposits and when we do it’s taking longer and longer to develop them,” he said.
Brent mentioned Mirasol Resources, a South America-focused explorer which already enjoys the backing of a number of majors. Mazumadar’s stock recommendation for a miner likely to benefit from an upside move in the gold price was royalties-focused firm Sandstorm.
Mirasol could fit the bill for the kind of mining stock Brian Leni had in mind when he talked about “risky jurisdictions” at PDAC. The Junior Stocks Review founder feels that countries where mining and prospecting has been difficult in recent years now offer a great opportunity, as the best finds that are left are likely to be in these mining backwaters. Leni listed Ecuador as one such country - it acquired a terrible reputation after a fallout with the government cost Kinross Gold a fortune when it exited in 2013, but now has a new political and mining regime in place.
Leni also voiced enthusiasm for the overall effects of M&A, adding that it could well extend to the silver mining sector this year.
Finally, Uranium enjoyed a fillip this week after world’s largest producer announced a 65% sales jump as it benefitted from production cuts around the world. These left Kazakhstan-based Kazatomprom, which has almost total access to one of the world’s largest uranium resource bases, free to benefit from rising prices last year. The company predicted further gains in 2019.
Among the Uranium stocks, Uranium Energy Corp. (NYSE:UEC) received some heavy endorsement as a Reuters poll of 4 analysts showed strong ’buy’ recommendations all round. On average, the brokers are predicting a price rise of more than 160% in 12 months.