Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

Junior gold miners reap investment windfall from majors

Direct investment in the TSX-listed shares of junior gold companies this year is the highest it’s been in the last ten years, CIBC World Markets says in a report.

The bank’s research analysts calculate that about $290 million has been invested directly in juniors so far in 2017 — “the highest recorded in the past decade and double the value of 2015 and 2016 combined.”

“Nearly one-half of the equity raised by junior gold stocks (under $1 billion in market capitalization) on the TSX in 2017 has been in the form of direct investment by a larger gold stock,” CIBC states. “No previous year has exceeded 20%.”

In addition, “the weight of money flow currently observed into passive investment funds (such as quant and ETFs) suggests that junior gold stocks may need to rely more on direct investments from larger companies in the future [rather] than the traditional equity issues to fundamentally driven institutional investors.”

The institutional equity research team anticipates that there will be more direct investments to come and that juniors with projects in the Yukon, Quebec, Ontario and Nevada are the most sought-after.

“Direct investment by senior gold stocks in juniors is expected to build momentum,” the authors write. “Many of the TSX-listed junior exploration companies with interesting projects already have larger company shareholders. M&A is the next logical step in the sector.”

The study explains that the trend reflects two key realities: “more money flow to passive investments that do not participate in equity issues” and “a growing sense of urgency for larger gold companies to address the potential future gold production decline through lack of recent exploration and development spend.”

“The gold companies within our stock coverage are forecast to increase output modestly from 37 million ounces in 2016A to about 40 million oz. in 2020E, then decline each year thereafter based on our current assumptions for existing mine life extensions and new project development,” the study found.

It also notes that acquiring junior gold stocks “reduces the risk of eroding capital compared to larger scale acquisitions of producing companies.”

Moreover, equity issues of TSX-listed gold stocks in the first six months of 2017 totaled $0.9 billion, down from $2.5 billion in the same period of 2016 and $1 billion in 2015.

While Agnico Eagle Mines (TSX: AEM; NYSE: AEM) has been the biggest investor over the last two decades (since 2010 the company has invested in more than 20 junior gold stocks), other gold majors that have been active are Goldcorp (TSX: G; NYSE: GG), Kinross Gold (TSX: K; NYSE: KGC) and Newmont Mining (NYSE: NEM).

This year, in February, Agnico Eagle invested C$5 million for a 10% stake in Otis Gold (TSXV: OOO) ; C$22.9 million for a 15% stake in Goldquest Mining (TSXV: GQC) in March; and $9.8 million for a 10% stake in Candelaria Mining (TSXV: CAND; US-OTC: CDELF) in June.

Goldcorp invested $35 million for a 13% stake in Auryn Resources (TSX: AUG; US-OTC: GGTCF) in January; $2 million for a 1% stake in Probe Metals (TSXV: PRB) in February; $6.3 million for a 20% stake in Triumph Gold (TSXV: TIG) in March; and $7.5 million for a 15% stake in Contact Gold (TSXV: C), also in March.

Newmont invested $6 million for a 7% stake in Goldstrike Resources (TSXV: GSR) in March, and $149.5 million for a 20% stake in Continental Gold (TSX: CNL) in May.

Kinross Gold (TSX: K; NYSE: KGC) invested $5.2 million for a 10% stake in Bonterra Resources (TSXV: BTR; US-OTC: BONXF) in March, while Kirkland Lake Gold (TSX: KGI; US-OTC: KGI) invested $7.3 million for a 1% stake in Metanor Resources (TSXV: MTO) in April; and Barrick Gold (TSX: ABX; NYSE: ABX) invested $8.3 million for an 11% stake in ATAC Resources (TSXV: ATAC) in April.

Of all the investments, CIBC notes, Newmont offered the most generous premium. Its investment in Goldstrike, for example, “was the highest premium paid (94%) over the past five years on the TSX,” while Newmont’s investment in Continental “was the third highest premium paid at 48% to the previous close.”

The report points out that the share price reaction “is generally positive on the day of the announced stake by a larger gold company almost regardless of the premium or discount offered for the shares.”

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