Major miners see gold in juniors
Investment ramp-up in search for new sources
Gold miners have invested around $ 290 million in exploration companies during the first six months of the year, the highest level recorded in the past decade and double the value invested in the previous two years combined, according to a CIBC World Markets Inc. report released Wednesday.
“Nearly one-half of equity raised by junior gold stocks on the TSX in 2017 has been through direct investments. No previous year has exceeded 20 per cent,” the report’s authors noted.
The dramatic ramp- up in investment from senior gold producers comes as they search for new sources of growth to head off a potential production decline after sitting on the sidelines during one of the most brutal commodity cycles in history.
Production at gold companies covered by CIBC is expected to rise modestly to 40 million ounces by 2020 from 37 million ounces in 2016, then decline each year based on the bank’s forecast for existing mine life extensions and new project development.
Mining projects typically take between seven to 10 years to progress from exploration to commercial production, so miners feel a sense of urgency to act now, the report said.
“Prospective junior gold companies may hold the key to defer a gold production decline in the absence of considerably higher metal prices than today.”
The trend also appears to reflect a reduction in investments by active funds managers as they lean towards passive investments, the report’s authors noted.
Agnico Eagle Mines Ltd. continues to dominate direct investment in junior miners as it maintains its decadeslong strategy of acquiring companies during the exploration phase, CIBC said.
It’s a strategy the Torontobased miner has employed since the 1970s, when it made investments in two of its currently producing mines, Goldex and LaRonde. It has invested in more than 20 juniors since 2010, five of them complete takeovers.
But competition for attractive juniors has been getting more fierce, said Agnico CEO Sean Boyd.
“We have seen a lot of our competitors employing the same strategy over the past 12 to 18 months.”
Others senior producers such as Goldcorp, Kinross and Newmont are also actively pursuing investment in juniors. Those with projects in the Yukon, Quebec, Ontario and Nevada have attracted the most attention, CIBC said.
“That’s actually good for the industry because what that will result in is the really good opportunities that can generate high returns, get the right experience attached to them early enough.”
CIBC’s mining analysts expect investments in juniors will build on the momentum seen since the beginning of 2017, with increased merger and acquisition opportunity being the logical next step.
Increased competition among the seniors squeezed by declining production benefits juniors by driving up their valuations, said Stephen de Jong, CEO of exploration company Integra Gold Corp., which was among the first juniors to draw attention from major players.
Integra shareholders approved a $ 590 million cashand- stock acquisition by Eldorado Gold Corp. Wednesday in a deal expected to close next week. Integra, with assets in Quebec’s lucrative Val-d’Or region, received two other offers before settling on Eldorado.
“What you’re seeing is interest in the sector. To have multiple offers on a company is historically not something you’ve seen a lot of,” said de Jong, who believes that trend will continue and minority stakes in juniors will start to result in full- blown acquisitions.