By Cameron French
TORONTO, Aug 6 (Reuters) - A couple of billion-dollar takeovers in Canada's mining patch could signal a flurry of new deals, as increasingly cheap small-cap miners become targets for acquisitive seniors seeking to add reserves.
Goldcorp's C$1.3 billion bid last week for explorer Gold Eagle follows Kinross Gold's C$1 billion move for Aurelian Resources a week earlier, both underscoring the willingness of top gold players to spend to ensure future production. "Because the stock market has corrected so much on the downside, it is probably cheaper for companies to make acquisitions on the public marketplace than to start (projects) from scratch," said Irwin Michael, portfolio manager at ABC Funds in Toronto.
With miners finding it increasingly difficult to find new deposits through exploration -- and wary of large takeovers amid tight credit markets, rising costs, and uncertain commodity prices -- big players now scour the market for smaller companies with development-stage properties.
And with investors taking a cautious approach to cash-strapped juniors, the field of targets has grown.
In a research note this week, Paradigm Capital said tight credit conditions and a widening valuation gap between small and large players has made conditions for acquirers the most attractive in at least three years.
Analysts Don MacLean and Don Blyth said shares of senior and intermediate players have fallen 11 and 12 percent, respectively, in the past six months, but emerging and exploration stocks have fallen 24 and 25 percent.
"This puts the larger cap stocks at an even greater advantage relative to the smaller companies, in terms of using their valuation multiple advantage to acquire the smaller companies," they said.
The Aurelian and Gold Eagle deals will only spur on more takeovers, they said.
After rising earlier in the year, the TSX materials index, which includes base metals miners and gold producers, is down 2.2 percent so far in 2008, versus a 2.9 percent drop for the broader TSX composite index.
DEALS IN THE WORKS
Tom Whelan, Canadian mining leader at Ernst & Young, said he suspects there could be several deals in the works as top players try to strike while the iron is hot.
"My own view is that the due diligence and all the deal making have been underway, it's just they haven't been consummated. From my perspective, it's just a matter of time," he said.
Geoff Burns, chief executive of No. 2 pure silver producer Pan American Silvertold Reuters that cash-strapped juniors have started phoning him looking for partnerships. "There's certainly a window that is opening that in my view was not open before,' he said. "Before, it was us approaching somebody else.. now it's coming back the other way."
While smaller players have suffered from the credit crunch, large miners have enjoyed rich cash flows due to still-strong metals prices, and CEOs of companies such as Barrick Gold have said they do not suffer the same constraints. Indeed, Teck Cominco will take on $9.8 billion in debt to finance its $14 billion buyout of Fording Canadian Coal Trust , announced last week.
Paradigm sees small players such as Detour Gold , Osisko Mining , Bear Creek Mining , Andean Resources and Andina Minerals as likely targets. "My sense is it's cheaper to mine for coal or gold or oil companies on (Toronto's) Bay Street that it is to put a spigot in the ground," said ABC's Michael