Resource World Magazine

24 www.resourceworld.com f e b r u a r y / m a r c h 2 0 1 6 Staying alive with mergers and acquisitions by Andrew Nelson, Davidson & Company The global gold industry is experiencing the impact of a relentless bear market that is entering year five. Gold started 2016 with a bang but the outlook for the yel- low metal remains tenuous in light of the strong US dollar. From explorers to producers, gold equi- ties are feeling the squeeze as the spot price continues to dwindle and the bot- tom trough has yet to be defined. Issuers are assessing all viable options to increase shareholder value, while forward-thinking miners are looking towards growth-ori- ented strategies. Mergers and acquisitions traditionally spike during market peaks and bottoms as companies seek growth and the acquisi- tion of quality assets at discounted prices. For instance, during recent bull market peaks in 2007 and 2011, there were 1,732 and 2,605 global mining deals closed with aggregate values of US $158.9 billion and US $149 billion, respectively. In 2011, even the junior sector experienced an all-time record of 1,355 deals of sub-$100 million acquisitions worth $36 billion. Deal flow in global mining has been weak and at its lowest level since 2003, as those working the levers wait for signs of a defi- nite market bottom. This was highlighted in 2014, which saw only 544 deals closed for a mere US $44.6 billion. Miners continue to focus on cutting costs and restructuring debt to improve financial strength. Only the most accretive deals are considered. Gold explorers have been crushed, since the current market has minimal inter- est in exploration activity and investors are not rewarding juniors for announcing high-grade drill intercepts. Most explo- ration is at a stand-still and the scarce capital remaining is primarily being allocated towards issuers with develop- ment-stage assets. Kaminak Gold's Coffee Project is a good example of this due to its high- grade, multi-million-ounce, gold deposit and robust economics. Kaminak is well- financed and recently issued a Feasibility Study that strengthened the econom- ics even further, thanks in part to a low Canadian dollar and sagging oil prices. Being located in the pro-mining Yukon Territory also helps make it a potential prized takeover target. Reduced exploration and a lack of meaningful discoveries (2M+ oz gold) will encourage gold producers to target defined ore bodies. Although the World Gold Council announced that 2014 global gold production was 114.36 million ounces, in the past five years less than 56 million ounces of gold have been discovered. The relationship between the annual amount of gold mined and discovered, globally, highlights an existing disconnect that will create future supply deficits, fur- ther fuelling consolidation. Contributing to this scenario, many of the undeveloped gold deposits are situated in high-risk countries, face environmental opposi- tion, and require billions in development costs, further limiting suitable acquisition targets. The easy discoveries were made over the last century and without new innovative exploration technology, multi- million-ounce deposits will not be as easily found. This lack of future supply in coming years should also pro- vide support for the price of gold. Gold producers are still struggling to generate positive operating margins at current spot prices because they positioned their companies in the prior bull market to function in a much higher gold price environment. Cost-cutting initiatives have seen producers drastically cut back or discontinue their exploration divisions. Executive management does not see the risk-reward scenario for deploy- ing exploration capital in today's market when a multi-million-ounce deposit can be acquired for a fraction of its discovery cost. As Ian Telfer, Goldcorp founder and Chairman, told The Globe and Mail, "Acquisitions are vital for survival. The only way mining companies can grow is through acquisitions and the only way they can survive is through acquisitions." Large gold producers such as Goldcorp, Barrick Gold, and Newmont Mining are the driving force behind industry con- solidation as their reserves are continually depleted. The easiest way to replenish reserves is through acquisitions. Goldcorp demonstrated growth strategy through its March 2015 acquisition of Probe Mines and its Borden gold project for $526 million in an all-share friendly takeover. The strategic purchase was in line with Goldcorp's disciplined growth strategy, which provides long-life production growth and a focus on cost containment. Other producers are realigning their project portfolios to reflect why they first went into the mineral extraction busi- ness. IAMGOLD sold its Niobec niobium mine in January 2015 for US $530 million to once again become a pure gold play. In addition to sharpening its focus, the cash injection ensured the company will be able Left to right, Tamara Oceguera, Audit Senior, Carmen Manhas, Manager, Dave Harris, Partner, and Catherine Tai, Principal, of Davidson & Company visiting SilverCrest's Santa Elena Mine in 2015. Photo courtesy Davidson & Company LLP. INVESTmENT

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