Issue link: http://resourceworld.uberflip.com/i/1207716
30 www.resourceworld.com F E B R U A R Y / M A R C H 2 0 2 0 of these companies, particularly because the move toward lower-cost exchange- traded funds (ETFs) has pushed more money toward larger-cap companies that have membership in stock market indexes – and that, in turn, is giving larger min- ers an advantage on the cost of capital over smaller ones. "The market for gold mining compa- nies has evolved in the last decade after disappointing returns repelled many generalist funds. Now, bigger companies automatically garner proportionately larger investments from exchange traded funds, and size really does open up a new class of investors," says Ross Beaty. It's more important than ever to be big," says Peter Grosskopf, chief executive of Sprott Inc. Larger capitalization companies are trading at increasingly bigger stock premiums compared with smaller miners, and they end up with much lower costs of capital as a result. "But it's not size for size sake," says Kingsdale Advisors in a recent report, An Activist Gold Rush. Kingsdale analysts found that unlike acquisitions of the past which were often motivated by the potential of increased gold production or diversification, recent M&A deals have focused more on capital efficiency and operational excellence, with management teams being one of the assets (or liabilities) evaluated. Additionally, Kingsdale analysts suggest that with the giants of the industry grow- ing, pressure will increase on others to improve as well, recognizing the need for rationalization and scale, which will see the M&A activity continue into 2020. Peter Gosskopf of Sprott agrees and is predicting a wave of merger activity among smaller mining companies with market caps between $800 million and $2 billion, with majors buying junior miners to fill their development pipeline. "This is just getting started," he says. Grosskopf says that while the dollar value of all deals in 2020 is not likely to match 2019, there are likely to be a greater number of smaller deals. "While senior gold producers were at the forefront of mergers thus far, we expect mid-tier companies to follow suit and account for most of the merger activity going forward," the latest Global Industry Overview – Mining and Metals Key Themes 2020 report highlights. "We can expect these producers to look further down the food chain to junior developer/explorers who control large, established resources with blue sky poten- tial. This will be a natural progression of the recent deal flow. The strategy of buying a basket of the best-in-breed resource-rich juniors at this low point of the cycle makes sense and will present good investing opportunities for informed speculators in 2020. n INVESTMENT