More M&A to come, Canaccord says

Despite strong gold producers and declining gold equity valuations, mergers and acquisitions in the gold sector have been fairly limited 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 in its Junior Mining Weekly. 

“We continue to believe that select gold producers are likely to attract interest from potential acquirers,” the firm 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 begin, it maintains there is a “compelling argument that M&A should increase over the next six to twelve months.”

Senior and intermediate gold producers are trading at 0.87x price to net asset value (P/NAV) with a 5% spot, and junior producers are trading at 0.76x P/NAV with a 5% spot. Last year the 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 has a discounted valuation on a P/NAV and a price to cash flow basis. 

Silvercrest is trading at 0.30x P/NAV with a 5% spot and 1.5x 2013E cash flow per share. 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 be three years.

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

Other potential acquisition targets are Keegan Resources (KGN-T, KGN-X) and Orezone Gold (ORE-T). Keegan is trading at 0.40x P/NAV with a 5% spot and Orezone is trading at 0.33x P/NAV with a 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 oz. potential], with economic studies outlining the potential to develop scalable gold projects.”

Canaccord predicts other likely acquisition targets are: Canaco Resources (CAN-V); Exeter Resource (XRC-T); MAG Silver (MAG-T); Colossus Minerals (CSI-T); and Sandstorm Gold (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 high margin assets that can be driven quickly to production, and become immediate cash flow generators, are of greater short-term interest.”