Majors are on the hunt for new metal

This time around, majors are not interested in size. They want value.

Conversations and conferences of late have reinforced a few factors that define today’s young mining bull market.

Majors Are On the Hunt

Talking to executives from junior companies, one comment just keeps surfacing: they are seeing overwhelming interest from majors. What that means is major miners – Newmont and Barrick and Goldcorp and Agnico, etc. – are meeting these junior companies to assess their projects, with an unmasked eye towards making deals.

The amount of interest makes sense. It’s been over a decade since major miners have looked down their project pipelines and found them bare. Sure, the blind focus on growing production (rather than making money…) meant the big boys were still making deals late in the last cycle, but in general those deals added big assets to portfolios already brimming with smaller opportunities.

[D]on’t expect a wave of M&A. Instead, we are going to see a wave of partnerships – joint ventures and equity investments that give majors a foot in the door with assets they like.

Now, after selling almost everything to survive the bear market, majors need to start restocking the pipeline again.

Usually that process starts with new production and near-development stories, but there just aren’t very many such assets around. The bear market derailed so many projects that only a small number are ready to be built or are newly operational. Majors are circling these opportunities but, because they know competition will be stiff, they are also going straight to exploration-stage opportunities.

This theme was overwhelming at a recent conference. Every junior – from project generators to single asset explorers, from companies focused on North America to those with assets in Eastern Europe or South America – every one spent more time meeting with majors than meeting with investors. The majors were there with big teams and those teams clearly had mandates to look high and low for opportunities.

This kind of major interest matters, but don’t expect a wave of M&A. Instead, we are going to see a wave of partnerships – joint ventures and equity investments that give majors a foot in the door with assets they like. And while such deals aren’t as exciting for the market as takeouts, they are important because they make it possible for juniors to advance their projects quickly and to focus on exploration instead of where and how to find capital.

Optionality Offers Leverage, But Little More

Optionality plays have done very well in gold’s run to date. Investors have piled into the idea of leveraging gold via a portfolio of projects with significant ounces in the ground.

That leverage will remain. And leverage to a rising price is a big enough win  for many. However, if a win for you means a takeout or a construction decision, optionality isn’t the right game.

This time around, majors are not interested in size. They want value. Goldcorp did not buy Kaminak because a mine at Coffee would impact its production profile significantly; they bought it because Coffee will be an economically robust mine that will help Goldcorp’s bottom line.

Value accretive assets are the name of today’s game. That means things like infrastructure, metallurgy, social license, design complexity, and costs really matter. Large deposits with challenges in these areas are not of interest. They may yet come back into vogue, but if they do it will not be for a while. Majors destroyed so much capital buying for size without focusing on practical value in the last cycle that the focus on value accretive assets will stick around for quite a while.

Juniors are Gaining Confidence

Juniors are gaining confidence that capital is available. It has taken time for that confidence to establish, which is why so many juniors initially planned only small drill programs this year – they were still in full capital conservation mode.

Now they see oversubscribed financings left and right, backing everything from advanced assets to grassroots exploration and from the revival of old projects to new discoveries. The confidence means drill programs are being expanded, new targets are being tested, and new partnerships or acquisitions are being inked.

Most moves are still small relative to the exploration programs or deals we see when things are hot, but they are a heck of a lot bigger than they were six months ago, let alone a year ago.

Those Active Now Will Win Later

The bear market was tough. Lots of companies went into complete hibernation; lots of people left the sector. It takes time for companies to get going again from standstill and for people to insert themselves back into the sector.

That’s ok; it’s part of the process. But the companies and people who stayed alive through it are leading the pack today.

Companies that stayed alive are reaping the rewards of their bear market efforts. The efforts were often directed at tasks that could be accomplished, like advancing engineering or metallurgy or permitting or social license. Not sexy stuff – but when the market is so turned off that stocks fall on hot drill results, it makes sense to focus on the boring.

And now, with that ‘boring’ stuff well in hand, the companies that persevered have options.

The benefits of staying active extend beyond obvious corporate achievements. A constant topic of conversation today is who is working with whom to buy what – and who else is trying to buy the same asset. Competition to buy ounces in Nevada, for example, is very stiff, but groups are racing each other to buy assets in Nova Scotia, Romania, Mexico, and Ghana, among other places.

The competition is not limited to assets either – groups with cash to deploy are competing for equity stakes in good juniors. The conclusion: the companies and people active today offer the best odds of success as this bull gets going. Place your bets!