Despite recent reports of a gloomy outlook for M&A in the mining sector, writing-off mining M&A activity may be premature. In Joe Deux's report for The Street, he suggests that a wave of M&A activity could lie ahead for companies operating in the small and microcap gold mining and exploration space.
But what leads to this conclusion?
With the price of gold dropping below US$1,400 per ounce in Q1 2013 and remaining below US$1,400 since then, capital has become scarce for junior gold mining companies, making it increasingly difficult for such companies to raise the equity required for drilling and project development. There has also been a steady decline in share price this year for many gold producers, with the junior players being no exception. In his report, Joe Deux suggests that this combination of scarce equity and low share prices could create an entry point for intermediate and senior gold mining companies that are considering acquiring exploration or early development stage properties.
While intermediate and senior gold producers have not been exempt from the woes wreaking havoc on the mining industry, having spent the better part of 2013 doing internal reorganization and implementing cost-cutting measures, it may be time for these companies to look to future production and growth. Indeed, a dismal market does not mean there are no viable projects available. Rather, with the decline in the price of gold and share prices, there may be an increased appetite for M&A: junior gold mining and exploration companies — especially those with promising properties — are ripe to be picked up and may be available at a discounted price.
Most of the targets poised to be available are in the exploration or early development stages, so it may be hard to predict longevity of a property or whether it will become a high grade/high volume producer. What, then, should investing companies consider in their pursuit of a target? Potential investors should focus on the staying power potential of a junior gold mining or exploration company, meaning that the target should have a good treasury. Because it continues to be a challenge to raise additional equity in capital markets — and because this is unlikely to change until gold rises above US$1,400 per ounce — a promising target would be a gold mining or exploration company that has a well-managed treasury which allows operations to continue without looking to the markets for equity.
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