While the $1.5-billion offer from Goldcorp Inc. (G/TSX) for Gold Eagle Mines Ltd. (GEA/TSX) and Kinross Gold Corp.'s (K/TSX) $1.2-billion approach to Aurelian Resources Inc. (ARU/TSX) signal renewed M&A interest in both the Canadian mining and gold space, Xstrata PLC's (XTA/LSE) unsolicited US$10-billion takeover approach to Lonmin PLC (LMI/TSX), the world's third-largest platinum producer, demonstrates that base metals are being targeted as well.
These trends could also spark a turnaround for the struggling but miner-rich S&P/TSX Venture composite index, which has fallen below lows set in August, 2007, when the credit crunch unofficially began, and in January, 2008, due to elevated concerns that junior miners would not be able to raise capital.
"Have no fear, we believe the end of the weak small cap mining markets is near," Canaccord Adams analyst Wendell Zerb told clients, noting that the Venture index rallied 35% after bottoming on Aug. 15, 2007.
He expects more deals will drive renewed speculation in juniors in the coming months, with such names as Corriente Resources Inc. (CTQ/ TSX), Andina Minerals Inc. (ADM/TSX-V) and Detour Gold Corp. (DGC/TSX) among the many highlighted as potentially becoming involved in M&A.
Andina and Detour also showed up on a recent list of takeover targets with large resource bases in favourable jurisdictions put together by Paradigm Capital. Andean Resources Ltd. (ADN/ASX), Bear Creek Mining Corp. (BCM/TSX-V) and Osisko Mining Corp. (OSK/TSX) also made the cut due to their strategic deposits that may attract suitors. Each are also considered potential "company-makers" that the market would likely be willing to fund through to development on their own.
Analysts Don MacLean and Don Blyth said the challenging financing environment and outperformance of large cap gold stocks versus their smaller emerging and exploration peers have made conditions for acquirers the best since late 2005.
Both Kinross and Goldcorp are using equity to fund part of their recent offers, which is easier given that their shares have risen more than 30% in the past year.
"This tells us that, on a relative basis, the majors see value in the junior sector and that the discounted junior valuations represent an opportunity for value accretion through acquisition," Canaccord's Mr. Zerb said.
Gold prices have held up, but producers, many of which are rich with cash but have depleting reserves, have reaped most of the benefits.
"The bankers aren't lending and a lot of investors don't want to fund equity issues," said George Topping, base metals analyst at Blackmont Capital. "So as time wears on as cash starts to dwindle, a lot of these juniors are going to be in a weak position and be susceptible to being taken out on a good deal for the major."
He sees similarities in the base metals sector and expects more deals will follow HudBay Minerals Inc.'s (HBM/TSX) friendly offer for zinc miner Skye Resources Inc. (SKR/TSX). Mr. Topping pointed to Chariot Resources Ltd. (CHD/TSX), Antares Minerals Inc. (AIS/AMEX) and Equinox Minerals Ltd. (EQIX/NASDAQ) as potential M&A candidates.
Among all metals, but more so for gold, another motivation for large cap acquirers might be that they find it cheaper to buy ounces than it is to explore for them. Likewise, the risk-reward for investing in juniors may be losing favour for investors.
But the upside to juniors not being able to advance their projects could be higher metals prices, which could in turn fuel interest in these same names.
And if senior producers are bullish on metals prices and brokers are too, it seems like only a matter of time before more deals emerge.