Canaccord forecasts more M&A on the way

Despite the strong fundamentals of gold producers and declining gold equity valuations, M&A in the gold sector has been fairly limited so far this year. But Canaccord Genuity argues that’s about to change.

“Given the strong fundamentals for the sector, the growing balance sheets of the producers, and the low relative valuations for the sector, we expect to see M&A increase in the coming months,” Canaccord wrote today in its Junior Mining Weekly.

“We continue to believe that select gold producers are likely to attract interest from potential acquirers,” it added, noting that it also sees “potential for junior gold producers to attract acquisition bids, given the potential for a faster payback period on acquisition.”

While Canaccord concedes that it is hard to predict when the next wave of M&A in the gold sector will actually begin, it maintains that there is a “compelling argument that M&A should increase over the next six to twelve months.”

Currently senior and intermediate gold producers are trading at 0.87x P/NAV (5%, spot), with junior producers trading at 0.76x P/NAV (5%, spot). By contrast, at the end of last year the comparable figures were 1.16x P/NAV and 0.94x P/NAV, respectively.

“While this means that gold producers do not have the same currency (equity value) to go out and make all-share transactions,” Canaccord points out, “it also means that there is arguably greater potential for accretive cash acquisitions.”

Among the companies it believes are likely acquisition targets is Silvercrest Mines (SVL-V), which it thinks has a significantly discounted valuation on both a P/NAV basis and a P/CF basis.

Silvercrest is trading at 0.30x P/NAV (5%, spot) and 1.5x 2013E CFPS and Canaccord believes that if Silvercrest was acquired for $2.25 per share in cash, or $191.5 million, the payback at spot gold and silver prices would only be about three years.

“It would be challenging to find a significant development project with a shorter payback period,” it claims.

Other potential acquisition targets it says are Keegan Resources (KGN-T) and Orezone Gold (ORE-T). Keegan is trading at 0.40x P/NAV (5%, spot) and Orezone is trading at 0.33x P/NAV (5%, spot).

“Both companies have scalable gold development projects in relatively low-risk (by African standards) jurisdictions,” it says. “Both have significant and expanding resource bases (5+ million ounce potential), with economic studies outlining the potential to develop scalable gold projects.”

Other companies that are likely acquisition targets Canaccord predicts are Canaco Resources (CAN-V); Exeter Resource Corp. (XRC-T); Grayd Resource Corp. (GYD-V); MAG Silver (MAG-T); Colossus Minerals (CSI-T); and Sandstorm Resources (SSL-V).

“Many of the larger cap gold producers have a series of large, lower-grade development projects in their development pipeline,” Canaccord says. “While these large, lower grade projects will continue to be important contributors to a major’s production plan, we believe that high margin assets that can be driven quickly to production, and become immediate cash flow generators, are of greater short-term interest.”