Gold juniors reap investment windfall from majors

Direct investment in TSX-listed shares of junior gold companies is the highest it’s been in the last 10 years, CIBC World Markets says in a report.

The bank’s research analysts calculate that $290 million has been invested into juniors this year, which is “double the value of 2015 and 2016 combined.

“Nearly one-half of the equity raised by junior gold stocks [under $1 billion in market capitalization] on the TSX in 2017 has been in the form of direct investment by a larger gold stock,” CIBC says. “No previous year has exceeded 20%.”

In addition, “the weight of money flow observed into passive investment funds (such as quant and exchange-traded funds) suggests that junior gold stocks may need to rely on direct investments from larger companies in the future, rather than the traditional equity issues to fundamentally driven institutional investors.”

The institutional equity research team anticipates that more direct investments are in store, and that juniors with projects in the Yukon, Quebec, Ontario and Nevada are the most sought-after.

Gold major Agnico Eagle Mines has been a leading investor, taking stakes in more than 20 juniors since 2010, including Otis Gold, which is advancing the Kilgore project in Idaho. Credit: Otis Gold.

“Direct investment by senior gold stocks in juniors is expected to build momentum,” the researchers say. “Many of the TSX-listed junior exploration companies with interesting projects already have larger company shareholders. Mergers and acquisitions are the next logical step in the sector.”

The study says that the trend reflects two realities: “more money flow to passive investments that do not participate in equity issues,” and “a growing sense of urgency for larger gold companies to address the potential future gold production decline through lack of recent exploration and development spending.

“The gold companies within our stock coverage are forecast to increase output modestly from 37 million oz. in 2016A to 40 million oz. in 2020E, and decline each year thereafter based on our assumptions for existing mine life extensions and project development,” the study found.

It notes that acquiring junior gold stocks “lowers the risk of eroding capital, compared to larger-scale acquisitions of producing companies.”

Moreover, equity issues of TSX-listed gold stocks in the first six months of 2017 totalled $0.9 billion, down from $2.5 billion in the same period of 2016 and $1 billion in 2015.

While Agnico Eagle Mines (TSX: AEM; NYSE: AEM) has been the biggest investor over the last two decades (since 2010 the company has invested in more than 20 junior gold stocks), other gold majors that have been active are Goldcorp (TSX: G; NYSE: GG), Kinross Gold (TSX: K; NYSE: KGC) and Newmont Mining (NYSE: NEM).

In February, Agnico Eagle invested $5 million for a 10% stake in Otis Gold (TSXV: OOO); $22.9 million for a 15% stake in Goldquest Mining (TSXV: GQC) in March; and $9.8 million for a 10% stake in Candelaria Mining (TSXV: CAND; US-OTC: CDELF) in June.

Goldcorp invested $35 million for a 13% stake in Auryn Resources (TSX: AUG; NYSE-MKT: AUG) in January; $2 million for a 1% stake in Probe Metals (TSXV: PRB) in February; $6.3 million for a 20% stake in Triumph Gold (TSXV: TIG) in March; and $7.5 million for a 15% stake in Contact Gold (TSXV: C), also in March.

Newmont invested $6 million for a 7% stake in Goldstrike Resources (TSXV: GSR) in March, and $149.5 million for a 20% stake in Continental Gold (TSX: CNL) in May.

Gold major Agnico Eagle Mines has been a leading investor, taking stakes in more than 20 juniors since 2010, including Goldquest Mining, which holds the Tireo property in the Dominican Republic. Credit: Goldquest Mining.

Kinross Gold (TSX: K; NYSE: KGC) invested $5.2 million for a 10% stake in Bonterra Resources (TSXV: BTR; US-OTC: BONXF) in March, while Kirkland Lake Gold (TSX: KGL; US-OTC: KGILF) invested $7.3 million for a 1% stake in Metanor Resources (TSXV: MTO) in April. Barrick Gold (TSX: ABX; NYSE: ABX) invested $8.3 million for an 11% stake in ATAC Resources (TSXV: ATC), also in April.

Of all the investments, CIBC notes, Newmont offered the most generous premium. Its investment in Goldstrike, for example, “was the highest premium paid [at 94%] over the past five years on the TSX,” while Newmont’s investment in Continental “was the third-highest premium paid at 48% to the previous close.”

Gold major Agnico Eagle Mines has been a leading investor, taking stakes in more than 20 juniors since 2010, including Candelaria Mining, which owns the Caballo Blanco project in Mexico. Credit: Candelaria Mining.

The report points out that the share price reaction “is generally positive on the day of the announced stake by a larger gold company, almost regardless of the premium or discount offered for the shares.

“Since 2014, the few instances of a negative share price reaction for the junior tend to occur for placements at a discount to market with an overprint of weaker gold price and GDXJ movement.”

The report notes that juniors with projects “in jurisdictions beyond the footprint of larger gold companies have not [yet] attracted the attention of strategic investors, such as Euromax in Macedonia, Erdene in Mongolia, Dalradian in Ireland and Marathon in Newfoundland.

“A few investments may become more than a toehold,” the report adds. “Junior gold stocks that appear to offer appeal for a senior to acquire” include Continental, Dalradian Resources (TSX: DNA; LON: DALR) and Probe.