Detour GoldFrom the Summer 2008 issue of Canadian
Business magazine
Gerald Panneton is sitting on a gold mine — almost.
The CEO of Detour Gold (TSX: DGC) manages a Canadian junior mining company that has an estimated resource of 7.8 million ounces of gold, but hasn’t yet built a mine to extract it. With gold hovering near US$1,000 per ounce, Detour Gold has a pretty valuable chunk of property in the Abitibi Greenstone Belt of northern Ontario. But the company is also exactly what hungry mining giants want to gobble up — a small company with proven resources — potentially making it a golden play of another kind.
Gold and silver’s biggest players are eager to break out their overflowing wallets because of a commodities boom spurred by the U.S. recession, a falling greenback and the subprime financial crisis, which have sent investors flocking to the safe haven of gold. And with no recent significant gold or silver discoveries, it’s easier for these miners to reach into their deep pockets for a junior or two than scour and drill the land for precious metals on their own. More often than not, that acquisition hunt will bring them to Canada, where small mining companies abound. There are hundreds of junior mining companies in Canada, most on the Venture exchange, but there are more than a few on the senior exchange as well.
Typically, juniors ripe for the picking own a chunk of land with a proven resource of gold or silver that has been explored and drilled, but lack the cash flow and expertise to build and operate a mine. Detour Gold fits that bill. It paid about $75 million in cash and stock in 2006 for its flagship — and only — property, which it bought from Pelangio Mines Inc. (TSX: PLG). Today, Detour’s market cap is about $730 million. But there are other attractive juniors. Recent acquisitions of Canadian juniors include Viceroy Exploration by Yamana Gold (TSX: YRI) in 2006, Cumberland Resources by Agnico-Eagle (TSX: AEM) in 2007 and Miramar Mining by Newmont (NYSE: NEM) in 2008.
Richard Gray, a precious metals analyst at Blackmont Capital in Toronto, says Aurelian Resources (TSX: ARU), Bear Creek Mining (TSXV: BCM), Aquiline Resources (TSX: AQI), Osisko Exploration (TSX: OSK) and Gammon Gold (TSX: GAM) are all now at the stage that their bigger competitors might want to take a look. But investors should be wary about companies that do business in developing nations. For instance, the Ecuadorian assembly writing the country’s constitution recently approved a decree to revoke most mining concessions, which could affect companies such as Aurelian Resources and Dynasty Metals & Mining (TSX: DMM) that have assets there. “At the current price, Aurelian’s probably still a good target as no one really knows what the situation in Ecuador will ultimately be,” says Gray.
Another company Gray recently picked as an attractive target, Metallica Resources (TSX: MR), on March 31 announced a merger with New Gold (TSX: NGD) and Peak Gold (TSXV: PIK). The new company will be known as New Gold and will have a market cap of about US$1.6 billion. The merger, expected to be complete in July, values Metallica Resources at $751 million, a 12.7% premium above the company’s closing price on March 28, the trading day prior to the announcement.
A record 1,700 deals worth almost US$160 billion were conducted worldwide last year, according to Mining Deals 2007 Annual Review, a report released in March by PricewaterhouseCoopers. That strong level of activity should continue this year. David Christie, director of gold and precious metals at Scotia Capital, doesn’t expect any mergers between seniors but believes they will fight it out for the best juniors.
Often, the ideal time for juniors to cash out is once a discovery is made. After all, they’ve done what they do best: explore. Then the seniors and intermediates can take over and develop and operate the mine. And an acquisition overture can be precisely what some executives of juniorsare digging for. “Not many juniors think they will be the next senior,” says Gray. “The game is to buy the asset and sell it at a premium. That’s the goal of this industry. A 30% premium to the current share price is where negotiations begin. Who wouldn’t want to be in this business?”
But Panneton insists he’s not searching for a quick sale. “I’m not seeking to be a target,” says Panneton, a former executive at Barrick Gold. “But I can’t stop people from looking at the asset. At the end of the day, it’s the shareholders’ decision to sell, not the executives. We can only make recommendations.”
Panneton believes Detour is one of the 2%–5% of junior mining companies that can make the transition from explorer to bullion producer, because it has equity, debt financing and bench strength — experienced executives who have operated mines before.
Canadian juniors make particularly good investments for larger mining companies since the country’s celebrated mining history has created a hub of geology, exploration, mining and financing expertise. And those companies with assets in Canada know their precious commodities are buried within a politically stable nation.
The mere location of the asset in Canada could be also a selling point. Osisko Exploration includes a slide in its corporate presentation that compares political risk among 12 juniors, seven of which have Canadian headquarters, and concludes that Osisko faces the lowest political risk because it is the only one with an asset in Canada. Osisko owns a gold property in the heart of Quebec’s rich Abitibi Gold Belt, another positive since that province is the best place in the world to set up a mine, according to the Fraser Institute’s Survey of Mining Companies 2007/2008 released in February. Quebec is tops because of its geology and the provincial government’s mining policy, which includes low energy costs, a refund on certain exploration activities and low mining tax rates. Nine of the survey’s top 20 regions for mining were in Canada.
No wonder Canadian juniors continue to be targeted. Such a trend could eventually hollow out the mining sector. PWC reports that acquisition deals by Russian and Chinese businesses increased sixfold from 2005 to 2007, and predicts both countries are likely to be active bidders for mining companies this year. But there are still many notable Canadian companies among the senior and intermediate precious metals ranks that could be prospective buyers, such as Barrick, Goldcorp, Kinross, Yamana, Agnico-Eagle and Silver Wheaton. By comparison, Canadian base metal juniors are likelier targets for foreign takeovers, since the country’s largest players — Inco, Noranda, Falconbridge and Alcan — have all recently been bought out.
Panneton, for one, isn’t spending time worrying about being taken over. He’s focused on transforming Detour into a producer by 2011. He’s also hunting for more gold, both with drill rigs on his Detour Lake property and with two geologists combing North America for something Detour can make its own bid for — like another junior