Michael Kosowan doesn’t think 2014 is necessarily going to be strong year for gold.
So until sentiment changes, the Sprott Ltd. (TSX: T.SII, Stock Forum) investment advisor is telling clients to be on the lookout for junior gold stocks that come equipped with what he calls a “merger and acquisition backbone.”
These are companies with high quality assets that may prove attractive to larger companies which need to replenish their gold reserves and are keeping an eye open for acquisition targets.
In an interview with Stockhouse, Kosowan said he is prevented by Sprott’s compliance department from disclosing the names of companies that he thinks will be swallowed up in the near future.
But he was prepared to cite some recent deals that provide a degree of insight into what potential acquirers might be looking for.
They include Agnico-Eagle Mines Ltd.’s (TSX: T.AEM, Stock Forum) $205 million acquisition of Cayden Resources Inc. (TSX: V.CYD, Stock Forum) in September, 2014.
Cayden’s asset portfolio includes a 100% stake in the El Barqueno property, which covers 41,000 hectares in the Guachinango gold district in Jalisco State, Mexico. El Barqueno is an early stage gold project with a history of heap leach production (approximately 250,000 ounces in the 1980s).
“Cayden was ripe for acquisition because the geology was indicative of millions of ounces of gold and they controlled a district,” said Kosowan.
“Seniors like the concept of owning a district because there is more potential for them to uncover additional ounces,’’ he said. “Quite frankly, it makes them look smart as well.”
But geology isn’t the only thing that made Cayden attractive, he says.
The management team has a track record of success, and a clear vision for the company.
Kosowan says Agnico also liked the fact that Cayden’s key projects are located in Mexico, a stable jurisdiction known for large discoveries, and familiar to the acquirer.
When B2Gold Corp. (TSX: T.BTO, Stock Forum) announced in June that it was buying Papillon Resources Ltd. and its promising Fekola gold project in Mali, West Africa for US$570 million, analysts viewed the deal as another move by B2Gold to position itself as a mid-tier gold producer.
Kosowan said the transaction offers some interesting insights into what the larger firms are looking for.
“B2Gold is a company that is not afraid to move into more geopolitically colourful jurisdictions,” said Kosowan. “To me, the Papillion acquisition was all about geology and geological horsepower. It was a very high grade deposit that showed the potential for growth.”
It’s why B2Gold was willing to pay $113 per ounce. “This isn’t necessarily cheap when you consider that average for the year has been about $64,” said Kosowan.
The important thing for B2Gold was the opportunity to bolster its pipeline of future projects.
That may also have been important to Rio Alto Mining Ltd. (TSX: V.RIO, Stock Forum) when it announced a friendly merger deal with Sulliden Gold Corp. Ltd. in May, 2014. But Kosowan says other factors came into play in that transaction.
“The industry is still very cognizant and reeling from the large cost low tonnage, low grade assets that were acquired in the heady days when analysts believed gold was going to move from US$2,000 to US$5,000 in the blink of an eye,’’ he said.
But now that sentiment has changed, acquirers are taking a more frugal approach.
Rio Alto owns the La Arena gold mine in Peru, which is located about 30 kilometres from Sulliden’s Shahuindo project.
“Rio Alto is a very good mine operator. What they acquired in Sulliden is one of those heap leach opportunities where the cap ex was low enough for them to [believe that merger was worthwhile],” said Kosowan.
Properties like Sulliden’s represent a very good mix of gold production, ore leachability, and attractive returns. It’s an asset that could be bought and digested by a relatively small company like Rio Alto (market cap $844 million), which is merely a third tier producer.
West Kirkland Mining Inc. (TSX: V.WKM, Stock Forum) bought Allied Nevada Gold Corp.’s (TSX: T.ANV, Stock Forum) Hasbrouck and Three Hills properties in Nevada for similar reasons.
Kosowan said Hasbrouck is little more than an earth moving exercise. But it fits with one of West Kirkland’s strategic goals, which is to be in production when the gold price starts to move.
“They want to be producing gold as we tip over US$2,000 ounces rather than pointing to a hillside and saying that is where our gold is going to come from,’’ said.
Now that m&a activity seems to be picking up this year with $11.2 billion worth of deals completed or in the works (according to Bloomberg), Kosowan says his investment ideas tend not to be based on a prognosticating about the gold price and where it is headed.
“I am really trying to buy quality assets,” he said.
“What Stockhouse readers might find useful is getting stocks with an m&a backbone, because even if gold prices don’t move, the m&a backbone is a feature that could preserve the value of the shares until sentiment in the gold space begins to turn.”
The Sprott advisor is telling clients to focus on assets in West Africa, Mexico and Canada.
Michael Kosowan Bio.
Michael Kosowan is a specialist in resource equities. He holds a Masters Degree in Mining Engineering and is a licensed professional engineer. He holds a dual licensing in the brokerage industry and continues to advise clients on both sides of the border.