Speculation mounts about Iamgold’s takeover targets

Iamgold (IMG-T, IAG-N) chief executive Steve Letwin says the cash-rich miner plans to spend $400-$500 million on an acquisition in the Americas over the coming months. The mid-tier gold producer has about $1.4 billion in cash and no debt and wants to double its current gold production of 850,000 ounces by 2017.

“If we can’t pull the trigger on something in the next three months that makes sense for our shareholders we haven’t done our job,” Letwin recently told The Globe and Mail newspaper. “If we’re going to buy, we’re going to buy now. These equities are ridiculously cheap, some of them.”

Letwin’s remarks sent many investors and analysts scurrying to their spreadsheets to see if they could decipher which junior might make the leap onto Iamgold’s shopping list based on a set of criteria ranging from geography and long-term prospects to relative valuations and current resources.

Canaccord Genuity was quick to comment on the flurry of speculation in its daily Morning Coffee research summary and pointed clients to Iamgold’s private placement investments late last year in three exploration companies in Colombia: Colombia Crest Gold (CLB-V), Bellhaven Copper & Gold (BHV-V), and Tolima Gold (TOM-V).

It also noted that other acquisition possibilities might include Richmont Mines (RIC-T, RIC-X) and Aurizon Mines (ARZ-T, AZK-X) in Quebec, where Iamgold already operates the Doyon mine and is building the Westwood mine. And in South America, Iamgold “could potentially joint venture or acquire Newmont’s Saramacca project” near Iamgold’s Rosebel mine in Suriname, or perhaps Guyana Goldfields (GUY-T) “whose stock has been under major pressure since the release of its feasibility study for its Aurora project.”

Northern Securities mining analyst Kwong-Mun Achong Low reasons that the most likely takeover candidates (in alphabetical order), are Belo Sun Mining (BSX-T), Probe Mines (PRB-V), Prodigy Gold (PDG-V), Rainy River Resources (RR-T), Sandspring Resources (SSP-V) and Sulliden Gold (SUE-T), and claims they could all be of interest to Iamgold or “any company” for that matter that is “looking for significant exposure in the Americas.”

“We limited the geography where we feel IAG would be comfortable operating in the Americas, likely where an exploration office or existing operation already exists,” he wrote. “These include Peru, Colombia, Suriname, Brazil, and Quebec. We expanded the geography to include Guyana and Ontario as places that exhibit similarities to the aforementioned areas for mining and which would afford IAG more options.”

To further distill the list, Achong Low said he was “mindful of projects that did not have onerous capital commitments,” and said that the majority of projects he chose had acquisition and capex investments of under what he considers “to be a manageable $1 billion.”

Breaking down each company, Achong Low argues that competition for Belo Sun’s Volta Grande project in northeastern Brazil “could be high given that AngloGold also signaled its interest in the country where it plans to double production to one million ounces annually by 2018.” Achong Low also views Brazil “as one of the better performing BRIC countries that remains open to much foreign investment.” As for the asset itself, Volta Grande is a high-grade (1.7 gram gold per tonne) open-pit project with a prefeasibility study due in August this year with a feasibility study to follow in December.

He likes Probe Mines’ Borden Lake project, too, for both its exploration and development potential, and notes that its shares have been under pressure lately, perhaps due to the fact that investors are waiting for updated metallurgical results due in the third quarter of 2012. Achong Low adds that he isn’t concerned about the results and believes Probe “is a good takeover candidate given it performed well on both the total acquisition cost and production per $1,000 investment measures.”

The analyst notes that the recent preliminary economic assessment of Prodigy Gold’s Magino project in Ontario suggests that annual production of 249,000 ounces of gold could be produced at cash costs of US$461 per oz. “The relatively low cash costs helped Prodigy to the lowest TAC value as a percent of the gold price,” he says, and notes that a feasibility is expected before the end of the year. TAC stands for total acquisition cost,  which is the summation of takeover capital, capex and operating costs and represents the $/oz the acquirer would have to pay to extract an ounce of gold from the target. “This value for Prodigy on a $/oz term was the lowest (cheapest) of the group of six  companies I was looking at for IAG,” he writes in an email response to questions.

Rainy River Resources’ project in northwestern Ontario, meanwhile, “offers significant size potential…which may warrant the additional investment above our $1 billion mark.” According to a recent preliminary economic assessment, annual gold production at the Rainy River gold project of 329,000 ounces of gold would carry cash costs of US$553 per oz. and an updated PEA is due in the second quarter of this year.

As for Sandspring Resources and its Toroparu asset in Guyana, the project “offers exposure to copper a metal Iamgold obviously likes given its recent investments in early stage, copper-gold assets in Colombia via Bellhaven Copper & Gold.” Toroparu contains 420 million pounds of copper in the measured and indicated category and 169 million pounds copper in the inferred. Moreover Achong Low says he likes Guyana as a mining jurisdiction because its government is pro-mining, and believes “IAG would do well there given its success in Suriname with the Rosebel mine.”

Finally, he notes that Sulliden Gold’s Shahuindo project in Peru is a simple and low-capex heap-leach operation in a low-cost mining jurisdiction. The project contains about 1.4 million ounces of gold “for which Sulliden is conducting ongoing tests for possible extraction” and a feasibility is due before the end of the year.

But if Achong Low had to pick one name, he says, it would be Belo Sun Mining.

“I believe IAG would likely want to stay near to its Latin American roots to leverage all of the on-the-ground exploration knowledge that it has gained over the years and Belo Sun captures the essence of what an acquirer would be looking for,” he concludes. “It is also interesting that it adopted a shareholder rights plan today. “