It’s one thing to glimpse the future, another entirely to know the path you will travel to get there. With the metals mining industry, consolidation is a foregone conclusion. What is less clear is what that consolidation will look like.
Will the world’s major miners focus on gobbling up each other, as in BHP Billiton’s
The answer, of course, is all of the above. For the would-be targets of consolidation, though, joint venture agreements might provide some much-needed defense against being devoured.
Small mining companies that are competing to convert resources in the ground to profits in shareholders’ hands are wrestling with tight credit markets and ballooning costs. Meanwhile, large miners struggle to replace the reserves they’re mining today with new discoveries. If they were to join forces, both sets of problems would be closer to solutions.
What’s behind door No. 4?
The small mining companies, or juniors, have four options available for achieving production and growth:
- Blaze the trail solo
- Be swallowed whole
- Merge with another junior to achieve economies of scale
- Enter joint venture agreements with established producers.
The most common choice for juniors is to go it alone, using credit facilities and share offerings to bring production online. When metal reserves are sufficient, once a junior miner breaks into production, the road to organic growth funded by cash flow is a thing of beauty for investors.
Canadian junior Taseko Mines
Is resistance futile?
As an investor in junior miners, I have mixed feelings about the value of acquisitions for shareholders. Bema Gold was my favorite gold stock until the company was acquired by Kinross Gold
On the other hand, the 33% premium paid by Goldcorp
Mergers among juniors generate economies of scale, and the resulting corporation is likely to have a more favorable case for acquiring credit facilities to fund rapid development.
Door No. 4: a win/win for investors
If banks are unwilling or unable to finance operations at a brisk pace, then joint-venture agreements can provide a very attractive alternative.
For majors like Newmont Mining
JVs are not always a quick fix, though. Blessed with enormous reserves of gold in the ground but lacking the financing to excavate it in a timely manner, Canadian miner NovaGold entered into JVs with two megaminers. Last November, construction at the company’s Galore Creek project was halted when JV partner Teck Cominco found cost overruns and delays required a second look at the feasibility study.
Meanwhile, the 50/50 JV with Barrick Gold for the company’s Donlin Creek project is on track. With a 29.4 million-ounce indicated gold resource that is expected to yield more than 1 million ounces of gold per year, patient investors are hopeful.
When it comes to investing within a space that is ripe for wide-ranging consolidation, investing in a basketful of companies of varying sizes and at varying stages of development is the best way to profit.
By dividing their metals allocations among several small bets, Fools may be likely to be on the winning end of more than one deal. However this consolidation plays out, diversified Fools will enjoy watching the trend unfold.