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Gold majors could hit ‘slam dunk’ with junior M&As

01 May 2012
JOHANNESBURG ( – With the gold price remaining resiliently high, mid-tier and major producers pumping cash, and junior equities more depressed by the day, analysts say Iamgold’s purchase of Trelawney mining last week could be a sign of things to come.

Hallgarten & Company mining strategist Chris Ecclestone on Monday went so far as to say that conditions may be perfect for a “slam dunk” for gold majors looking to buy out smaller ones.

While not anticipating a clear out of smaller gold explorers and producers, he pointed to there being many times more suitable candidates for mergers and acquisitions than there are buyers.

“I do not believe there would be a lot of bargaining taking place, but conditions certainly are favourable for good acquisitions,” Ecclestone told Mining Weekly Online in a telephonic interview.

The reason for this, he believed, was that many large gold miners were sitting on large amounts of cash, hedged since the 2008 global financial meltdown, and were now looking to put that cash to work in suitable small acquisitions.

Some of the gold majors were struggling with capital cost inflation at mines they are building, making in certain cases buying production cheaper than building.

However, he noted that larger companies in the market for mergers and acquisitions (M&As) were also cautious to possible “indigestion” that may result from such transactions. This was in reaction to Canada’s third-largest gold miner Kinross’ $7.1-billion acquisition of Redback Mining in 2010, and the ensuing $2.9-billion impairment hit it took in December, mainly at its Tasiast operation, in Mauritania.

Ecclestone expected 10 to 12 deals to take place during the year, stressing that companies would prefer to target producing juniors, rather than companies sitting on nonproducing deposits.

He said Agnico-Eagle, Goldcorp, Newmont, Barrick Gold and Centerra were all candidates that may consider M&As during the year.

Montrusco Bolton Investments fund manager John Goldsmith shared Ecclestone’s optimism about possible M&As during the year, saying he was surprised that there had not been more to date.

“Many majors are making talk that the gold price should be much higher. In fact quite a number of them are on record as saying the gold price should be near to the $3 000/oz curve,” Goldsmith told Mining Weekly Online.

He believed many majors were “sitting on the fence” with regard to M&As, heeding the clear warning the futile Kinross/Redback acquisition portrayed to the market.

Goldsmith added that the most recent M&A between Canadian miner Iamgold and gold exploration company Trelawney Mining was a good buy, owing to Trelawney’s main asset, the Côté Lake project in Ontario, Canada, being in an advanced stage of exploration