There have been some exciting mergers and acquisitions (M&As) within the junior mining sector over the past few months. As gold and silver settle from the previous move, many projects will be re-rated and acquired by majors that are struggling with decreasing resources. I believe the industry is undergoing consolidation and we’re seeing the beginning of a major international race to control future gold and silver ounces in the ground. The bull market in gold and silver is intact, and though we may see some short-term pullbacks in bullion prices, the junior mining sector will continue to outperform.
Investors are aware that the sector is ripe with takeover candidates as the junior miners outperformed bullion since the late-July rally began; not until mid-September did they underperform. Now it seems like the previous uptrend is continuing after finding support at the 50-day moving average. Junior explorers are gaining interest as investors transfer their strategically devalued fiat currencies into valuable precious metals resources in the ground.
As the dollar collapses to three-year lows, I expect more companies to acquire projects or consolidate to gain control of and leverage their exploration assets. The Federal Reserve has been quite vociferous about its goal of pumping the economy with more cash. And it appears the US is leading the race to devaluation, as many emerging markets have been critical of the Fed’s dovish actions. This is creating a domino effect wherein other countries are now forced to devalue their currencies in order to prevent the collapse of their own economies. A devalued currency helps an economy by making its products cheaper domestically and increasing exports.
The recent surge in M&A activity suggests the mining industry is predicting the price of gold will continue to appreciate for the foreseeable future. High-quality projects with high-grade mineralization and low cash costs are receiving a premium. As the price of gold rises, high-grade deposits with good assets will be accelerated into development and production.
I expect aggressive miners to buy out partners to gain 100% control of projects in order to expedite resource and reserve growth. When a miner controls the project completely, it can be more aggressive with resource expansion and development of a discovery. It also has leverage to the expansion of the resource. Particularly in an industry that’s interested in growth stories, companies are hungry for large open discoveries to replenish their reserves.
One company that’s taken a 100% control of a discovery is Fronteer Gold Inc. (FRG). The company bought out AuEx Ventures, Inc. for a premium due to the upside leverage to the expansion of the Long Canyon Project. The Long Canyon Project in Nevada has great potential for expansion because it’s completely open in all directions, is high-grade, and has exceptionally low cash costs. The cost to get this project into production is very low because it’s a heap-leach operation.
The $100 million cost is well within Fronteer’s ability to finance the development completely. With its asset base in Nevada, Labrador, and Northwestern Turkey and its current cash position of over $140 million, there should be no dilution to shareholders. This is a rare situation in the junior mining sector where investors constantly face share-dilution risk when companies need to raise capital to fund exploration or develop projects.
Long Canyon has been compared to an early stage version of Newmont Mining’s (NEM) Midas Gold Mine, which is a huge Carlin deposit. Carlin deposits continue to expand because they usually have deep, underground sulfide roots. Fronteer has not yet discovered these at Long Canyon. Both Fronteer and AuEx believe Long Canyon and West Pequop may be connected by a huge sulfide root system. And both believe what’s been found to date on both sides of the mountain is on the periphery of the main deposit. The closer the company gets to the center of the mountain, the higher the grades. Fronteer is now looking for the sulfide roots as it’s expanding a near-surface, high-grade oxide and trying to fast-track the project into production.
It seems Fronteer is getting a better view of where the high-grade stuff is located in Long Canyon. I believe the Pequop District could be Nevada’s next major mine with multimillion ounces of high-grade gold. A new resource estimate, expected in early 2011, will take into account the progress of the 2010 drilling program, which has expanded the project’s size and grade. I expect further drill results to continue to drive cash costs down and bring further recognition to this world-class discovery.
One company that I’m convinced is catching the eye of majors is International Tower Hill Mines Ltd. (THM). The company has resources of more than 10 million ounces (Moz.) gold on its Livengood Project in Alaska. As gold has made a significant move in 2010, International Tower Hill Mines has consolidated. Now, with the recent volume surge and break of the upper resistance line, I believe International Tower Hill Mines could continue the 2009 price trend and outperform bullion as the company develops different mining options that drive down costs.
I believe the company has the best development project in Alaska. In my opinion, it has the greatest chance of becoming a successful and operational mine. International Tower Hill Mines has what many of its competitors are struggling for: a favorable permitting and infrastructure situation. The mine is close to infrastructure, right off a central highway, and doesn’t have the same permitting issues as other major mines being developed in Alaska.
After many years of investing in mining companies and seeing the downfall of many mining investments, I’ve realized these two features are key to success. The Livengood Project is on an all-weather highway in a major mining center. The state of Alaska is also proposing a natural gas line that would connect and provide power to the mine. And there are no native claim issues. In addition, the project is in the top 2% of gold discoveries with more than 10 Moz. gold. The big producers are looking for large deposits to expand their resource bases, but they don’t want the risk associated with projects that have permitting issues or that lack infrastructure.
Down the road from Livengood is Kinross Gold Corp.’s (KGC) Fort Knox mine, which produced more than 260,000 ounces of gold in 2009. It’s only natural to assume that when a suitor comes to make an offer for Livengood, Kinross — with the infrastructure and labor force already there — will make a counter offer. The Fort Knox mine life will be nearing completion as Livengood begins.
International Tower Hill Mines has come to long-term trend support and broken to the upside. Major volume is moving in, and the second uptrend may be beginning. As it moves closer to a prefeasibility study and improves the project economics, the share price should receive a premium.
The global credit crisis and the low-interest-rate environment facilitated by central banks are causing more producers to find ways to utilize cash positions to gain resources with huge growth potential. This fiscal environment of currency devaluation and quantitative easing, which may continue for some time, will force the producers sitting on large cash positions to acquire more assets. There’s a lack of major discoveries, and companies showing impressive, high-grade results have seen huge share appreciation.
