Expect more M&A in the gold space, despite ‘slim pickings’

In a presentation, Minefinders (MFL-T, MFN-X) president and CEO Mark Bailey summed up the spirit of this year’s Denver Gold Forum – a place where the lobbying and meetings continue non-stop over three days from 7 a.m. over a continental breakfast until the wee hours of the next morning over drinks at the bar.

“We’re looking and we’re being looked at,” he said.

The company, which been looking for potential acquisitions in Mexico — where its Delores mine produced 75,000 gold-equivalent oz. last year — as well as Nevada, South America and Canada, hasn’t found anything to buy yet.

“It’s slim pickings out there,” he told the audience of mostly institutional investors, hedge fund managers and analysts (the investment bankers are relegated to the sidelines of the conference).

But he still sees M&A picking up in the coming months.

Adam Graf, a mining analyst and director at Dahlman Rose, says there is indeed a disparity between record nominal gold prices (which topped out at just over US$1,900 an oz. earlier this month) and the volume of deals being done.

“Certainly, (even) with high gold prices and wide margins, there still hasn’t been a lot of M&A — it’s been very sporadic,” he said in an interview at the show.

But as Bailey’s comments demonstrate, the lack of deals has not been for a lack of trying. So why haven’t there been more deals in the gold sector at a time when producers are bringing in cash hand over fist thanks to gold’s continued rise?

“The problem is most of these deposits, when you get down to it, are probably a lot more difficult than we’re being presented,” said Brent Cook, an analyst and editor of the newsletter Exploration Insights, in an interview at the show. “All these people’ve got deposits they want to sell, but when it comes down to the engineering and costs, the mining companies are looking at it and going, ‘Well, that really doesn’t work.'”

Cook says a lot of the projects out there are large, low-grade deposits that are “tougher to build and make money on than what a lot of the prefeas studies and 43-101’s we’re seeing are saying. That’s why (the majors) are not buying all these things – that’s why they paid so much for a company like Fronteer (Gold) and Andean (Resources), because those are real high-quality ounces.”

An executive with one small gold producer which has been looking at acquisitions in Canada confirms that the main problem is that many gold projects out there come with technical issues. While the company is profitably mining at its own operations, many other companies have produced technical reports that aren’t reflective of how much gold can realistically be mined at their projects.

And it’s not just the quality of projects available.

Ironically, the high gold price may actually be an impediment to deals — having given companies an inflated view of what their assets are worth, says Wade Nesmith, executive chairman of Primero Mining (P-T).

“The fact that there are so many people looking actually makes it harder in many respects to get deals done – people are signing confidentiality agreements right left and centre and I think that level of interest in someone’s asset probably contributes to the view that that person has about his or her asset when it comes time to sell it.”

Since its inception about a year ago, Primero has been looking for acquisitions in mining-friendly jurisdictions in the Americas to add to its single mine, San Dimas, in Mexico. A friendly deal to merge with Northgate Minerals (NGX-T, NXG-N) was recently scuttled when AuRico Gold (AUQ-T, AUQ-N) (formerly Gammon Gold) made a play for Northgate in late August. Northgate’s 180,000 oz.-per-year Young-Davidson mine, in Ontario, is set to begin production in the first quarter of 2012.

Nesmith says that’s another reason there’s some hesitation when it comes to closing an acquisition.

“People understand that once they announce, they’re putting both themselves and the other party in play and a lot of people don’t want to do that.”

Primero president and CEO Joe Conway says that while it was disappointing to have the deal fall apart, the company is “back in the saddle” and looking for other opportunities – whether it be another “merger of equals” with a producer, or an acquisition of a development-stage project.

“What everybody’s looking for is you need to get to a critical scale to attract investors,” Conway says. “The other thing is (with a) single-asset company – things can happen and you need to have a diversified production base in order to protect yourself in case something goes wrong in one area.”

While it’s difficult for senior producers like Barrick Gold (ABX-T, ABX-N) or Goldcorp (G-T, GG-N) to find acquisitions that would meaningfully add to their production profile, at the scale Primero is looking at around 75,000-100,000 oz, there are definitely opportunities, Conway says. An expansion at San Dimas is expected to double production to 200,000 per oz. by 2013.

“I think there are still lots and lots of good development projects, but the prices on those are moving up on a daily basis and at some point you need to take a good hard look at what your view is on the price of gold,” says Nesmith, who believes gold is not in a bubble and will head at least marginally higher.