Expect More Junior Mining Consolidation in 2014

Expect More Junior Mining Consolidation in 2014

As we enter a new year, the junior sector is showing surprising resilience despite an ongoing financing drought. Of the 81 mining delistings on the TSX and TSX-V in 2013, only 13 were forced to delist because they failed to meet exchange requirements. The rest were the result of M&A or at the request of the company.

2013 gave new meaning to the phrase “penny stock”

The reality is, though, that many juniors have become the walking dead, their shares almost worthless and their treasuries dry. By the end of 2013, about 60% of the 1,764 mining companies listed on both the TSX-V and TSX were trading at below $0.10 and collectively owed $1.4 bn to creditors, according to Kaiser Research Online. And the number of companies with less than $200,000 in the bank currently stands at about 860, representing 49% of the Canadian listed resource sector.

As a result, many of these companies will face suspensions if not outright delisting from the TSX and TSX-V when their audited financial statements come due, especially if the auditor happens to be a creditor.  The culling will be painful but ultimately good the sector because it will allow money currently spread too thin to focus on worthwhile exploration projects with talented management.

But even the most promising situations may need to strengthen their books in order to attract fickle investors. One way to do this is to merge with equals.

A classic example of this kind of survival strategy is the proposed merger between Asanko Gold and PMI Gold to combine gold assets in Ghana. With its relatively unexplored greenstone belts and reasonably stable political environment, West Africa – especially Burkina Faso and Ghana – has attracted a significant share of global exploration spending in recent years.

Consolidation Can Be Key to Survival

But the downside of the enthusiasm was that too many companies became involved in the hunt, diluting the accomplishments of the more successful players and encouraging inefficiencies.

The Asanko-PMI merger will replace inefficiency with synergy. The combined assets of the two companies represent measured and indicated resources totaling 7.5 mn oz. of gold that can be developed into an integrated mining operation instead of two standalone mines that would be difficult to finance in an environment of declining gold prices.

Other districts that could witness consolidation include:

The Guerrero Gold Belt, Mexico

The Guerrero belt southwest of Mexico City has been a hotspot for gold exploration in recent years. Several companies are exploring or developing high-grade gold deposits along the belt, adding about 600,000 oz. annually to the total pool of resources.

While more advanced juniors such as Torex Gold, soon to begin mining the Morelos project, may prefer to stay single, other companies such as Minuarum Gold, Newstrike Capital, Citation Resources and Cayden Resources could benefit from joining forces.

 

The Middle Cauca Belt, Colombia

The gold and gold-copper porphyry deposits of the Middle Cauca Belt have attracted several companies hoping to establish a new mining camp around AngloGold Ashanti’s anchor project, Coloso. However, because porphyries tend to be large but relatively low grade, enthusiasm for these deposits is not as strong as it was in a higher gold price environment.

Junior companies working in the area include Batero Gold Colombia Crest Gold, Continental Gold, Gran Colombia Gold, Sunward Resources, Seafield Resources and Tolima Gold.

Gran Colombia has one of the more advanced projects at Marmoto, an epithermal style deposit that contains resources of about 12 mn oz. gold and produced 22,000 oz. last year. Continental Gold is conducting advanced exploration on high-grade gold-silver-zinc veins containing resources of about 5.3 mn oz. gold and 19 mn oz. silver at the Buriticá project. Both projects have excellent surrounding infrastructure.

 

The Yukon’s Selwyn Basin, Canada

Exploration in the Selwyn Basin of the Tintina gold belt is in the early stages. Atac Resources touched off a gold rush there when the company discovered Carlin-style gold several years ago.  Atac, still the most active junior in the area, has delineated a significant gold zone on its Rackla project and has identified more than 40 early stage exploration targets.

Ryan Gold also holds promising targets in the basin but recently halted exploration in the Yukon until market conditions improve. Other juniors include Aben Resources, joint venture partners Carlin Gold and Constantine Metal Resources, Golden Predator CanadaNorthern Tiger Resources (which recently agreed to merge with Redtail Metals, consolidating a number of Yukon properties), and Victoria Gold.

Anticipate more consolidation among the juniors along the lines of the Asanko-PMI merger in 2014. Areas that look particularly ripe for these types of alliances include the West African gold belts, the Guerrero gold belt in Mexico, the Middle Cauca belt in Colombia, and the Selwyn Basin in Canada.