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Gold and Precious Metals

Video Transcript

M&A in Gold: 2014 and Beyond


M&A in the Gold Sector


JOE FOSTER: There is an ongoing M&A scene in the gold sector, and what drives it is the fact that gold deposits tend to be on the small side. The typical mine life of a gold deposit is somewhere between ten and fifteen years, and so producing companies are constantly looking for new deposits: new opportunities to bring gold mines into their pipeline to keep their productions going. There's a reason why gold costs $1,300 an ounce. It's because it's very rare. It's very hard to find. A gold-mining company typically can't find as much gold as it needs. It has to look at M&A, and there are many juniors exploring all over the world and taking risks. Some of these juniors are lucky and come up with a viable gold deposit; then they become M&A targets. This is how the industry rejuvenates itself over time: through M&A activity.


We've seen subdued M&A activity over the last several years due to the recent bear market in gold. This year, however, there has been a significant pickup. Some exciting mergers are taking place in the first half of this year, mainly amongst the mid-tier and junior companies.


Finding Value


FOSTER: Valuations are very attractive to us right now.  Even though the stocks are up some 30% or so this year, the valuations still look very attractive to us. The industry has fallen out of favor. Gold stocks have done very poorly over the last several years. It's going to take a lot to make up the lost value that has been destroyed over the last several years.  We’re in the process of recovering that value. Even though the stocks are up, we think they've got a long way to go to reach fair value. We haven't seen that much M&A in the sector because valuations are low. If you're running a company that's a potential acquisition target and you're trading at low valuations, you don't want to sell your company at a discount. In a low valuation environment it's hard to get companies to cooperate on the M&A front. We have seen significant M&A activity in the first quarter of 2014. One instance was a hostile takeover attempt, which brings out my point that the company, the takeover target, which was Osisko, wasn't willing to be purchased at current valuations, so the acquirer, Goldcorp, had to go hostile and attempt a hostile takeover for Osisko. At the end of the day, a white knight or white knights did step in: Osisko ended up being taken over by the combination of two companies. Yamana and Agnico were the successful companies in the takeover battle. Yet again takeover activity has been at low levels because companies aren't willing to be taken over at these low valuations.


Outlook for 2014 and Beyond


FOSTER: Our outlook for M&A is for more of the same. Many people are saying that we're going to see a wave of M&A activity. I don't necessarily believe that.  Valuations are still low. Companies don't want to sell when their values are so low. I think that's going to inhibit M&A activity. It is an ongoing theme, but I think M&A will continue at relatively low levels, as long as the gold price stays at current levels. If we get a move through $1400 an ounce and we see higher gold prices from there and a more positive trend in the gold market, I would expect to see more M&A start to heat up.


 

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