It has been all quiet on the merger front. But analysts at Canaccord Genuity are expecting to see an increase in gold sector merger and acquisition activity in the coming months, action that will be driven by strong fundamentals in the sector, the growing balance sheets of the producers, and the low relative valuations for the sector, they say.
"We continue to believe that select gold developers are likely to attract interest from potential acquirers; however, we also see potential for junior producers to attract acquisition bids, given the potential for a faster payback period on acquisition, the Canaccord analysts said in an update in the investment firm's Junior Mining Weekly.
In a period when gold producers are enjoying record margins, analyst Wendell Zerb said he would have expected to see more M&A activity in the gold sector, in part because the price of gold is up 25% year-to-date and the price of silver is up 34% in the same period.
But Zerb said activity has been limited by a number of factors, including conservative commodity price assumptions that companies typically use when they are looking at potential transactions, as well as a drop in the cut-off grades that miners use to calculate reserves.
"Given that many of the larger cap gold producers have not seen significant share price appreciations in 2011, in spite of the strong gold price environment, management may be reluctant to engage in M&A with what it views to be an undervalued share price, Zerb said.
"Regardless of the reason, M&A in the gold sector has been limited, he said.
However, for the reasons mentioned earlier, Canaccord analysts expect M&A activity to ramp up in the coming months. Potential acquisition targets include:
Silvercrest Mines Inc. (TSX: V.SVL, Stock Forum). Trading at $1.65 on Thursday, Silvercrest has a market cap of $141 million based on 85.73 million shares outstanding. Canaccord sees Silvercrest as a likely acquisition target because of is significantly discounted valuation on both a P/NAV basis and P/CF basis. "We estimate that if SVL were to be acquired for $2.25 per share in cash ($191.5 million), the payback at spot gold and silver prices would only be roughly three years."
Keegan Resources Inc. (TSX: T.KGN, Stock Forum). Trading at $7.82 on Thursday, Keegan has a market cap of $589 million, based on 75 million shares outstanding. Has scalable gold development projects in relatively low risk (by African standards) jurisdictions, significant and expanding resource bases (5 million ounces plus potential), with economic studies outlining the potential to develop scalable gold projects.
Orezone Gold Corp. (TSX: T.ORE, Stock Forum). Trading at $2.98 on Thursday, Orezone has a market cap of $248 million, based on 83.4 million shares outstanding. Has scalable gold development projects in relatively low risk (by African standards) jurisdictions, significant and expanding resource bases (5 million ounces plus potential), with economic studies outlining the potential to develop scalable gold projects.
Extorre Gold Mines Ltd. (TSX: T.XG, Stock Forum). Trading at $9.16 on Thursday, Extorre has a market cap of $838.5 million based on 91.5 million shares outstanding. Canaccord analysts see Extorre as a strong takeover candidate based on its high grade, high margin potential at its Cerro Moro project in Santa Cruz, Argentina.
Canaco Resources Inc. (TSX: V.CAN, Stock forum), trading at $2.91 on Thursday, Canaco has a market cap of $578.4 million, based on 198.7 million shares outstanding.
Exeter Resources Corp. (TSX: T.XRC, Stock Forum), trading at $4.32 on Thursday, Exeter has a market cap of $376.4 million, based on 87.1 million shares outstanding.
Grayd Resource Corp. (TSX: V.GYD, Stock Forum), trading at $1.60 on Thursday, Grayd has a market cap of $146 million, based on 91 million shares outstanding.
MAG Silver Corp. (TSX: T.MAG, Stock Forum), trading at $10.73 on Thursday, MAG has a market cap of $594.8 million, based on 55.4 million shares outstanding.
Colossus Minerals Inc. (TSX: T.CSI, Stock Forum), trading at $6.13 on Thursday, Colossus has a market cap of $643.2 million, based on 105 million shares outstanding.
Sandstorm Resources Ltd. (TSX: V.SSL, Stock Forum), trading at $1.43 on Thursday, Sandstorm has a market cap of $471 million, based on 329 million shares outstanding.