Another Angle on Gold M&A

From The Maven Letter | October 26, 2022

In the last week, I hosted two panels. One was with new or expanding gold producers. The other was with base metals explorers & developers on the outlooks for copper, zinc, nickel, palladium, and their stocks.

They were two great panels because the CEOs participating were top tier: experienced and successful junior mining execs and investors. Both conversations gave me a few new things to think about.

From the gold builders panel, the thing that stuck out was around mergers and acquisitions. Usually, when I talk to single asset builders or operators about M&A, the conversation is only about who might be interested in buying them. And that conversation has been a bit limited in the last few years because major gold companies are totally focused on Tier One assets: since the bear market, they have all transitioned to a smaller number of larger operations, rather than multiple smaller mines.

It makes sense, mostly because it’s efficient. That said there are risks too, like how big projects can blow up in big ways, but major miners have decided the risks are worth it and so Tier One assets – which usually describes mines that can produce 400,000 oz. a year or more for at least ten years – have been the M&A focus.

The thing is…that singular focus leaves a LOT of assets on the sidelines. And my conversation with these new mine builders and operators highlighted that they aren’t going to just sit quietly on the sidelines until majors change their approach.

No, astute management teams are seeing their own opportunities in today’s landscape. It comes down to this: just because the Barricks and Kinrosses of the world aren’t interested in smaller assets doesn’t mean they aren’t! Smaller assets can be very profitable when done right. Big companies aren’t good at small assets – they approach all projects with Big Build mentality, which inevitably leads to big costs and doesn’t prioritize innovative thinking around spending. But small operators can be very good at small assets – they have the focus and approach to do them right.

In a similar vein: major miners’ obsession with building big assets has shunted the stage approach to second tier…but it doesn’t deserve to be there. Big miners want to build the entire operation and run it for decades. And they have the pocketbooks to do so. For smaller operators, going full scale off the line is often not possible. Instead, staged builds make sense – start with a smaller version or an operation that taps only one of the kinds of mineralization and then use operating cash flow to expand.

This can really work. Of course, it can also backfire – Pure Gold is the most recent example of that. Pure Gold built its Madsen mine small at the outset with plans to use operating cash flow to expand…but after two years of struggle (the grade wasn’t as modeled, the rock was as competent as expected, processing costs were higher than forecast, and more) the company just shuttered the operation.

Mining is tough. Whether you build large or small, things can go wrong. What matters are the people – new mines only succeed when they are built by a team of experienced mine builders who communicate well and adapt to conditions and when management figures out a funding package that does not threaten success off the line.

Good teams like that focus on the task at hand…but are keen to do it again once that job is done. The best management teams know that assembling such a team is a huge feat and that there’s huge value in keeping the team together on another project if possible, whether that’s expanding the mine they just built or building another operation.

All of the gold builders and operators on my panel last week took or are taking a staged approach to their mines, so their teams have more work ahead. But they are also very much looking around for other opportunities.

And they exist. In fact, they are abundant because large miners only wanting Tier One assets is leaving all kinds of assets available for mid-tier miners or new single-asset operators to acquire. The fact that capital markets are all but closed and debt is expensive is redoubling the opportunity for companies that could acquire – since it’s so hard to finance their mine builds, junior management teams of not-yet-operators are likely open to mergers or an acquisition that would get their projects built.

This concept doesn’t create a clear opportunity for investors. It’s not a simple idea like Buy uranium exposure! Or There’s a copper shortage ahead! Instead, it’s an idea that amplifies the upside ahead for those small to mid-tier operators that have the capital and gumption to take advantage of this weak market and grow.

It takes capital in hand (or cash flow from operations) because the capital markets are closed. And it takes gumption because a stock is more likely to get punished than rewarded in the near term for announcing a growth deal.

But companies that can make moves have the chance to establish transformational portfolios now when things are very cheap.

Every one of today’s major gold producers got started with one asset and a team that deployed the cash from that one asset wisely, whether in growing that opportunity or buying other ones. Of course they did. But even though it should seem obvious that good teams use this downtime to grow – it’s much easier said than done. With metal prices sliding and recession talk rampant and investors exiting everything – it is very hard for a management team to pull the trigger on growth.

I think the takeaway here for investors is to watch for teams that do make growth moves because there is real opportunity out there. Stocks (and therefore projects) are highly undervalued and competition to buy is limited, yet most medium-term metal price outlooks are bullish. So the lesson I’m taking from that conversation is: watch for teams using this downturn to their advantage because there’s real opportunity to build a project pipeline today that could turn a small operator into a major contender in the coming years.

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