Contributed Commentaries
3 junior gold stocks to consider before M&A activity increases
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
While the healthy consolidation of recent out-sized gains in the gold space continues, this is a great time to consider accumulating a basket of junior developers controlling large projects being de-risked into the finance stage. With the gold price likely in the process of creating a new floor above $1800, it’s only a matter of when, not if, global producers begin concentrating on replacing depleting reserves.
With senior gold producers facing declining production profiles, shrinking reserves, and a return to rising production costs, I expect many of them will soon be in the process of targeting acquisitions to supplement their depleted pipelines. It is now cheaper for companies to buy developing or developed projects on Bay Street via acquisition, rather than to develop projects themselves given shortages of capable development teams and timeline pressures.
Overall, the remaining years of production for the miners included in a new report by S&P Global Market Intelligence fell by six years over the past decade, to about 14 from 20. The report shows major miners globally have seen their economically mineable gold reserves decline over the last decade, owing to a lack of new discoveries and a shift away from growth strategies to margin preservation.
Furthermore, 16 of the world's 20 largest gold miners saw their overall remaining years of production fall over the 2010 to 2019 period. At the end of 2019, global miner Kinross Gold Corp (KGC) had just nine years of remaining production, down dramatically from 24 years at the start of the period.
Since the global lock-downs began in March, most senior gold producers have been focused on becoming health and safety compliant while adopting remote working strategies. There have also been challenges conducting due diligence with the ongoing travel restrictions, making it difficult for them to execute M&A this year.
But 2021 is likely to be a different story, since there is no shortage of capital or projects as $2.6 billion has been raised in the sector since early May until now, Kai Hoffmann of Oreninc told Kitco News on the sidelines of the Mines and Money Online Connect conference last week.
Moreover, with forecasts of the gold price likely averaging $1900 per ounce through the remainder of 2020, windfall cash flows for global miners will place the sector in a net cash position by year-end.
With big money players and fund managers coming back from summer vacations next week, I expect many will be focusing on juniors controlling high-quality assets with exploration upside in established mining jurisdictions and at a more advanced stage. Before the M&A window begins to open, here are three junior developer take-over candidates for your consideration that fit these criteria:
Marathon Gold Corp. (MOZ.TO): Marathon’s principal asset is the 100% owned Valentine Gold Project in the Central Region of Newfoundland and Labrador, Canada, one of the top mining jurisdictions in the world. An April 2020 Pre-Feasibility Study outlined an open pit mining and conventional milling operation over a twelve-year mine life with a 36% after-tax rate of return and an average gold production profile of 175,000 ounces of gold per year for the first 9 years. The Project has estimated Proven and Probable Mineral Reserves of 1.87 Moz (41.05 Mt at 1.41 g/t Au) and Total Measured and Indicated Mineral Resources (inclusive of the Mineral Reserves) of 3.09 Moz (54.9 Mt at 1.75 g/t Au). Additional Inferred Mineral Resources are 0.96 Moz (16.77 Mt at 1.78 g/t Au). The company recently appointed Ausenco Engineering Canada Inc. as the lead consultant for the Feasibility Study, with results expected in Q1 2021. The total budget for the 2020 drill program is $10.2M, with $1.3M dedicated to the infill program. Marathon is well financed into next year with C$54M in the treasury at the end of Q2 and carries no debt.
Osisko Mining Inc. (OSK.TO): Osisko Mining’s principal asset is the world class and 100% owned Windfall Gold Project in the Abitibi greenstone belt, Québec, Canada, the Frasier Institute’s 4th most attractive mining jurisdiction in the world. An August 2018 Preliminary Economic Assessment (PEA), based on a May 2018 resource at $1300 gold, showed an after-tax rate of return at 32.7% with an average head grade of 6.7 g/pt au. An April 2020 updated NI43-101 resource estimate showed an Indicated Resource of 1.21 Moz (4.127 Mt at 9.1 g/t Au) and an Inferred Resource of 3.94 Moz (14.532 Mt at 8.4 g/t Au). The company has drilled over 1M meters on the project to date, and an additional 300,000m of drilling with 20 rigs is on-going at Windfall during 2020. The completion of resource drilling for a Feasibility Study by Q4 2021 is a priority and Osisko is well financed with C$320M in the treasury and C$500M fully diluted, with no debt.
Sabina Gold & Silver (SBB.TO): Sabina’s principal asset is the world class and 100% owned Back River Gold Project, which is contained inside an 80km long belt. This massive project contains a series of high-grade gold deposits in banded iron formation, located in southwestern Nunavut, Canada, one of the world's best mining jurisdictions. Back River is shovel-ready and fully permitted with social license in hand. The Goose Project is the District's proposed first mine and where the majority of the resources are located. The current global resource estimate boasts a Measured & Indicated Resource of 5.33M oz (28,242 Mt at 5.87 g/pt Au) and an Inferred Resource of 1.85 Moz (7,750 Mt at 7.43 g/pt Au). A September 2015 Feasibility Study on an Initial Project contemplating a 3,000 tonne per day operation, showed the mine would produce approximately 200,000 ounces a year and deliver an after-tax rate of return of 24.2% at US$1150 gold. The Company's on-going 8,500 meter exploration and infill drilling campaign continues to advance, with additional results expected throughout the balance of this year. The Project has been through the debt process and reviewed by the lender's independent engineer, while currently undergoing detail engineering. Sabina is well financed with C$75M in the treasury and no debt.
If you require assistance in choosing other quality take-over candidates in the junior space to invest and would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.
Full Disclosure: I have purchased shares of MOZ.TO, OSK.TO, and SBB.TO in the open market and also recommend all three to my subscribers. Please do your own due diligence before considering the purchase of any junior resource stock.
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