(Kitco News) - Copper M&A should heat up as a result of BHP (NYSE:BHP) and Lundin Mining (TSX:LUN) agreeing to buy Filo (TSX:FIL) for $2.96 billion (C$4.1B) and create a joint venture to develop the Josemaria and Filo del Sol deposits in San Juan Argentina, Neil Adshead, Consultant Analyst at Commodity Discovery Fund, said on Kitco Mining’s Digging Deep.
This week Adshead recorded an episode of Digging Deep with Kitco Correspondent Paul Harris.
“I suspect in every major mining company boardroom of the world, they will be asking questions of their own corporate development team saying, should we have done this deal? There will be pencils sharpened and people getting an email saying ‘come on, we need some growth’,” said Adshead.
With gold producers reporting that June quarter financial results and the gold price at near record levels of more than US$2,400/oz, Adshead said that high prices do not necessarily translate into higher margins as companies often use high prices to lower their cut-off grades. “I don't think we're going to suddenly see 50% of the mining industry making 50% profit margins. … When commodity prices rise, cut-off grades drop, and margins roughly stay the same,” said Adshead.
Higher prices continue to stimulate M&A activity with Integra Resources (TSXV:ITG) to acquire Florida Canyon Gold (TSXV:FGCV) for C$95 million in stock.
Adshead said he expects Vizsla Silver (TSXV:VZLA) to become the next large silver mine in Mexico after it published a preliminary economic assessment on its Panuco project in Sinaloa, targeting production of targets 15.2Moz/y for 11 years. The project would generate an after-tax internal rate of return of 85.7% and have a nine-month payback following an initial capital investment of US$224 million.
“One of my rules of thumb as an investor is if you see a payback of 12 months or less, then you definitely should have a look at the asset, the people and the study, because that type of asset is incredibly rare and usually very high quality,” said Adshead.
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