Investment Commentary: Desjardins picks top takeover targets in gold sector

Desjardins Securities’ veteran mining analyst Michael Fowler and his associate Joanne van Ballegooie continue to see investment potential in gold and gold stocks, and have put together a list of the top takeover targets in the sector.

Underlying all this bullish is Desjardins’ prediction that the gold price will average US$600 per oz. this year and US$750 per oz. in 2007.

Writing in their Aug. 30 gold-related Research Comment subtitled “Mergers and acquisitions phase still has some way to go,” Fowler and van Ballegooie suggest that the mergers-and-acquisitions frenzy we’re now witnessing in the base metals sector could soon spill over into the gold sector.

The analysts believe there are many factors that would push a gold company into carrying out an acquisition: a larger company would be of more interest to institutional shareholders, and therefore command higher premiums; a larger company would be better able to fund capital-intensive projects; a larger company is better able to diversify country risk; takeovers are able to provide much-valued near-term production growth and are a quick way to build up reserves; and a general view that gold prices are heading higher.

Looking back at recent acquisitions in the gold sector, Fowler and van Ballegooie note that it’s “difficult to really use a rule-of-thumb for potential acquisitions,” but do observe that acquisitions of undeveloped projects tend to be completed at their net asset value, while producing assets are taken over at a premium.

Within their list, the average takeover in recent years was made at an equivalent value of US$273 per reserve oz. gold and US$132 per resource oz. gold. This compares with a historical average of US$130 and US$75 per oz., respectively.

The analysts comment that the current acquisition level in the gold sector has not “really been that high, probably because companies hate doing hostile takeovers and the fact that there has not been too much cash in the system.”

Looking forward, they provide a valuable list of their favourite companies they see as ripe for a takeover, with their potential acquirers in brackets:Anatolia Minerals Development (ANA-T) (Kinross Gold [K-T, KGC-N]); Alamos Gold (AGI-T) (Newmont Mining [NMC-T, NEM-N]); American Bonanza Gold (BZA-t) (U.S. Gold [UXG-T]); Kinross (Bema Gold [BGO-T, BGO-N]); Cumberland Resources (CLG-T, CLG-X) (Miramar Mining [MAE-T, MNG-X], Newmont); Fortune Minerals (FT-T) (International Coal Trading Co.); Glencairn Gold (GGG-T, GLG-X) (Orvana Minerals [ORV-V]); Greystar Resources (GSL-T) (AngloGold Ashanti [AU-N]); Great Basin Gold (GBG-T, GBN-X) (Harmony Gold [HMY-N]); Gabriel Resources (GBU-T, GBBRF-O) (Newmont); Jaguar Mining (JAG-T) (Yamana Gold [YRI-T, AUY-X]); Lake Shore Gold (LSG-T) (Kinross); Linear Gold (LRR-T) (Goldcorp [G-T, GG-N]); Moto Goldmines (MGL-T, MOE-X) (AngloGold); Nevsun Resources (NSU-T, NSU-X) (Semafo [SMF-T]); Palmarejo Silver and Gold (PJO-T) (Goldcorp, Newmont); Randgold Resources (GOLD-Q) (Iamgold [IMG-T, IAG-N); Sabina Silver (SBB-V) (Wolfden Resources [WLF-T]); and Wolfden (Goldcorp).

Other gold companies that pop up on the analysts’ radar screen as potential takover targets are: Aurizon Mines (ARZ-T, AZK-X); Northern Dynasty Minerals (NDM-T, NAK-X); Orezone Resources (OZN-T, OZN-X); Northern Orion Resources (NNO-T, NTO-X); and Russian-listed Norilsk Gold (Polyus).

“We continue to like the golds and gold stocks. Kinross is our top pick, with Iamgold and Agnico-Eagle Mines as second favourites,” write Fowler and van Ballagooie. (A view expressed prior to Iamgold’s proposed takeover of Cambior [CBJ-T, CBJ-X].)