As the 10-week sideways consolidation continues to build a floor in the gold price just below multi-year resistance at $1800, Chinese global gold miners are making all-cash offers for small-cap juniors at large premiums. This recent wave of Chinese deals for junior firms has come while government lock-downs are systematically being lifted in select mining jurisdictions.
After Chinese firm Zijin Mining Group Co., Ltd. completed the takeover of Canadian miner Continental Gold Inc for C$1.3 billion in early March, Shandong Gold Mining, one of China’s biggest gold producers, entered into an agreement to acquire Toronto-listed TMAC Resources (TMR.TO) for around C$230 million on May 8th. But the deal will be among the first pored over by Ottawa after it announced in April that it would bring “enhanced scrutiny” to bear on acquisitions by foreign state-owned investors in a period where the COVID-19 pandemic has driven down the value of companies.
Then last week, Zijin nixed a growing bidding war amongst Canadian based firms to acquire Guyana Goldfields (GUY.TO) for C$323 million, bringing an end to a protracted takeover battle for the Canada-listed junior gold miner. Toronto-based Guyana Goldfields announced on June 3rd that it had received a binding proposal from an unnamed overseas-based miner to acquire the company, valuing it around 35% higher than a previously accepted offer from Silvercorp Metals (SVM.TO).
The third Chinese gold miner all-cash deal over the past five weeks was announced yesterday, when Shandong agreed to buy Australia-headquartered Cardinal Resources (CDV.TO), which operates in Ghana, for A$0.60 a share in cash. This offer beat the preliminary proposal announced by Nord Gold on March 16th of A$0.45775 a share. The Shandong offer values Cardinal at about A$300-million, which is a 75.5% premium to Cardinal’s 20-day unaffected volume-weighted average price and a 39.3% premium to its 20-day volume-weighted average price up to June 18th.
Chinese companies have not only been active buying up gold mines around the world recently but Shandong Gold Group, the state-owned parent company, signed up in 2015 to back a national Beijing effort to stockpile the precious metal. China is also the largest producer and consumer of gold in the world.
While China has been ramping up purchasing gold mining juniors at a premium, North American major miners have been more careful in doing deals that consolidate assets to minimize costs and maximize shareholder returns. Although deal-making among North American gold miners has picked up since the precious metal’s latest rally began in mid-to-late 2018, paying a zero premium to merge two small-cap junior equals has been the new M&A normal.
During the previous miner bull market run-up into 2011, acquisitions at a premium dominated M&A activity which led to many North American global miners overpaying for assets. As the gold price made a major top at $1920 that year, senior miners failed to deliver the expected performance and eventually had to write-down assets acquired during the brutal bear market that followed.
However, in the current gold bull market, mergers of equals have become more common recently, along with global miners taking strategic positions in junior developers. Having learned from mistakes made at the peak of the last gold bull run, companies became more creative to increase value and shareholder returns, rather than overspending to grow ounce production to simply get bigger.
Although it has been a rough ten years of challenging capital markets for junior miners since the last gold bull market ended in 2011, new money has been flooding into this tiny sector since the beginning of May. And investors have been taking note of juniors that have JV’s with larger mining firms, as these senior companies have basically done most of the due diligence for them.
Moreover, Joe Foster, portfolio manager of VanEck International Investors Gold Fund (INIVX), told Kitco News this week that the financial situation for gold-mining companies may be the best he’s ever seen in a long career that started as a geologist and later as a fund manager.
“I’ve been in the gold-mining industry for all of my career. I don’t think I’ve ever seen it as healthy as it is today,” he said. “They’re firing on all cylinders. They’re doing a great job of controlling costs. They’ve got their balance sheets in pristine condition. They’re very well managed companies.”
Robust balance sheets and ongoing free cash flow for the producers relative to the juniors has fueled the potential for senior miners to restock development pipelines in the very near future. Given further growth in the value discount between producers and exploration/development companies, as the gold price builds a new floor above $1600, I expect the more traditional M&A will return to the junior space once the impact of COVID-19 subsides.
These near-future transactions will primarily focus on junior developers in the process of de-risking high-quality assets with significant exploration potential in established mining jurisdictions, and likely at a more advanced stage.