With what I believe to be a granite foundation for higher gold prices now firmly constructed, and many profitable gold miners positioned with considerable sums of cash and credit, this forward-looking Fool sees accelerating consolidation activity as a foregone conclusion.
Joint venture agreements will continue to provide an important road forward for juniors, while some may look to merge with one or more competitors. I believe, however, that outright acquisition of juniors by producing miners will typify the coming wave of gold consolidation. With that in mind, let's take a look at some of the miners with cash-lined pockets, and try to select a well-suited junior for their Foolish consideration.
The geography of opportunity
The grass may look greener on distant pastures, but for gold miners the greatest opportunities often lie in their own backyards. Acquiring assets adjacent to existing operations can reduce development and operating costs enormously by leveraging existing equipment and infrastructure. Because of their adjacent locations in the prolific Red Lake mining district of Ontario, Canada, I believe Goldcorp (NYSE:GG) and Rubicon Minerals (AMEX:RBY) make for a logical pairing. Rubicon has uncovered bonanza-grade ores at Red Lake. Since Goldcorp founder and former CEO Rob McEwen owns nearly a quarter of Rubicon shares, I presume I'm not the first to ponder such a pairing.
Goldcorp recently netted approximately $840 million from a convertible note offering, and indicated that $330 million of that sum will go to debt repayment. That leaves roughly $510 million of fresh capital in the coffers, compared to a $470 million enterprise value for Rubicon. As rich as Goldcorp is in gold reserves, a Rubicon acquisition would keep Goldcorp's Red Lake operations squarely on the map as one of the richest and most prospective gold mine complexes in the world.
Meanwhile, the largest gold mine in Canada in terms of reserves remains Agnico-Eagle Mines' (NYSE:AEM) flagship LaRonde mine in northern Quebec. Agnico-Eagle has remained intently focused upon organic growth through rapid development and expansion at the company's six core properties. After celebrating the commissioning of Pinos Altos during the third quarter, only the Meadowbank project will remain under development. Accordingly, I believe that Agnico-Eagle may shift back into acquisition-mode, and the company's announcement Monday that total revolving credit lines have been expanded to more than $900 million provided that oh-so-subtle tell.
If I were at the helm of this miner, I would take a long look at Osisko Mining. Although not an adjacent property, Osisko's Malartic project is only about 20 kilometers from LaRonde. I'm cognizant of the company's stated objective to acquire smaller companies or projects, but I feel that Osisko's 6.28 million ounces of gold reserves would provide an optimal boost to Agnico's development pipeline with only minimal interruption of the present growth spurt. With a market capitalization of almost $1.5 billion, though, Osisko might already have grown beyond Agnico's reach.
Considering core competencies
Yamana Gold (NYSE:AUY) has divested non-core assets recently, raising some cash in the process. Although I believe the company may continue to focus upon existing projects, one opportunity leaps out at me as the perfect golden pairing. Yamana already mines massive quantities of copper, and micro-cap Taseko Mines (AMEX:TGB) seems to lack the resources to develop the aptly named Prosperity project and unlock its 4.7 million ounces of gold reserves. With an enterprise value of just $381 million, or $81 per ounce of gold, Taseko is a steal even without considering the low-cost, operational Gibraltar mine and the company's 4 billion pounds of copper reserves. A Taseko purchase would leverage Yamana's dual expertise in copper and gold, while Taseko shareholders could find Prosperity.
With $2 billion in cash, a major miner like Barrick Gold (NYSE:ABX) might be best-suited for a large-scale project like Seabridge Gold's KSM project in British Columbia. Only titans like Barrick or Newmont (NYSE:NEM) possess adequate resources to cover KSM's $3.4 billion development cost, but KSM's 27.8 million ounces of gold would be a feather in any major's cap. Alternatively, Barrick might consider acquiring NovaGold Resources, which enjoys untapped riches beyond just its joint venture with Barrick for the 29 million-ounce Donlin Creek project in Alaska.
Foolish takeaway
No one can precisely predict the deals that will ensue, but this Fool finds real value in pondering the possibilities. While I don't recommend buying equities purely on buyout speculation, I believe that the same attributes that make certain gold juniors particularly attractive to larger competitors also render them excellent vehicles for leveraging further increases in the price of gold. Investments in gold juniors requires substantial due diligence, but the research is like searching for buried treasure. Happy prospecting!
Further Foolishness:
- Buying gold below $300 per ounce.
- Wholesale gold divestment.
- The titans will lead the way.
