Wave of Gold Sector M&A Unlikely to Start in Africa
In looking at some recent articles on the gold sector, one topic frequently comes up– M&A. I agree with most pundits that M&A will pick over time. However, we’re far off from the imminent renaissance of gold M&A that some are forecasting. Off the top of my head, I can recall 6-7 deals recently announced or closed in 2014. Among these there are few similarities that strike me as significant, however at least 4 deals have been done for assets in Africa. Typically a wave of M&A starts with Majors jumping on board with large low-risk deals. I find it odd that Africa is a prime target. Given the gold price plunge and recent turmoil in Africa, (not even including the more recent Ebola problem) I would think places like the U.S. and Canada would make more sense.
Agnico Eagle’s and Yamana’s acquisition of Osisko Mining a better example
The Agnico, Yamana deal is more inline with my thinking. In June, Agnico Eagle Mines Limited (NYSE: AEM) teamed with Yamana Gold Inc. (NYSE: AUY) to acquire Osisko Mining Corp., a deal that closed on June 16th. There was a lot of twists and turns and multiple players involved. This has been the largest gold M&A deal so far this year. Agnico Eagle maintains a portfolio of equity interests in junior miners, watching them develop with an eye towards possibly acquiring some of them outright.
Turning back to Africa, it has been the target in at least 4 proposed or closed transactions. On October 14th, Semafo (TSX: SMF) made an all cash acquisition offer to Australian listed Orbis Gold (ASX: OBS) for A$0.65 cents per share. The deal values Orbis at about C$ 155 million. Both Semafo and Orbis have assets in the West African country of Burkina Faso. This is an interesting move as Burkina Faso is not considered out of harm’s way for Ebola. Mid-tier Semafo has a market cap of approximately C$1.2 billion and nearly C$100 million of cash.
On October 3, 2014 B2Gold Corp. (NYSE: BTG) announced the closing of its $543 million acquisition of Papillon Resources (NASDAQ: PAPQF). This was another African asset acquisition. The Papillon acquisition is expected to increase B2Gold’s annual production from 400,000 ounces to 900,000 ounces by 2017. Papillon’s flagship asset is the feasibility-stage Fekola gold project in Mali, Africa. B2Gold already has producing mines in Nicaragua and the Philippines, and is developing the Otjikoto project in Namibia.
One off African deals won’t be the start of something big…
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On December 20, 2013, B2Gold Corp. completed the acquisition of Volta Resources Inc. (TSX: VTR). This sub $100 million sized deal of Volta by B2Gold will add to B2Gold’s development portfolio an 81% interest in the Kiaka gold project in Burkina Faso, Africa and a 100% interest in two additional exploration projects in Burkina Faso. The Kiaka gold project is an advanced stage project with the potential to sustain an average annual production rate of approximately 340,000 ounces of gold over a 10-year mine life.
On February 6, 2014 Asanko Gold Inc. (TSXV: AKG) and PMI Gold Corporation (TSXV: PMV) announced the completion of Asanko’s acquisition of PMI GPld. Asanko Gold, a Canadian exploration company focused on West Africa, agreed to buy PMI Gold for about C$183 million to target 400,000 ounces of annual output of the precious metal by 2017. Asanko said the combination of its Esaase gold project and PMI’s neighboring Obotan projects in Ghana will have a combined 7.5 million ounces of measured and indicated gold resources. So there you have it, 2 deals in Burkina Faso, 1 in Mali and 1 in Ghana.
Some African focused companies have even put out a for sale sign,
“We’re probably a good target right now,” Graham Briggs, CEO of Harmony Gold Mining Co. (HAR), South Africa’s third-largest bullion producer, said in an interview last week. “A low share price, we’re fairly good with our cost control. If we had bigger management fees to take out it would be even more of an advantage. We have low debt.”
Gold companies need to fill in production gaps in coming years
I think these African deals show that the writing is on the wall, companies need to acquire near-term production even if taking on considerable risks. The Majors have not even dipped in a toe in as they remain busy restoring balance sheets and divesting non-core assets. Gold companies might come up against some competition as many billions of dollars is said to be on the sidelines. For example, Mick Davis, former head of Xstrata just raised an additional US$ 1 billion bringing his dry powder up to a reported US$ 5 billion for mining assets, (not just gold).
A global production shortfall is almost certainly coming, it’s a question of whether it’s in 2016 or 1 or 2 years later. In the meantime, assets closer to home, such as low cost, low-risk companies in the U.S. and Canada will get a lot of interest if they aren’t already. Despite the above mentioned African deals, risk mitigation is of paramount importance. The beginning of a tsunami of gold M&A will not have its origin in Africa in my opinion. If true, then the handful of non-African deals in the past 12 months is nothing compared to what’s to come.
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