Buoyant precious metals prices and the rollout of COVID-19 vaccines means that 2021 has begun with an air of expectation for the realisation of pent-up merger and acquisition activity as corporate teams will be able to resume due diligence site visits.
Much of the M&A in 2020 involved projects in neighbourhoods where the acquirers were already operating, but with many producers seeing record output in 2020, the need to replace depleted ounces is becoming more urgent, and the strong cash flows from high gold prices means many companies have the treasuries to support M&A action.
While capital discipline continues to be a mantra in many boardrooms, recent M&A has featured synergies as a key rationale behind transactions involing companies seeking opportunities to further pare back costs and increase margins.
Consolidation has also been a theme with growth-orientated companies seeking to increase their relevance and access to finance at cheaper rates as their market capitalisation increases.
As part of its Global Gold 2021 series of reports, Mining-Journal.com is exploring the relatively finite universe of development stage projects with the aim of identifying which projects are most likely to advance into production and these are most likely to be M&A candidates.
We start here with an examination of feasibility stage projects in the Americas.
Mining-Journal.com has identified 19 feasibility stage projects in the Americas in the hands of junior miners, representing some 36.6Moz of aggregate potential production, some 3.2Moz of potential annual gold production and US$6.3 billion of initial capital expenditure.
The projects have an average capital efficiency of $168/oz, average all-in sustaining cost of $706/oz, and an average after-tax internal rate of return of 29% at an average $1,351/oz gold price. Of the eight projects in Canada, nine in Latin America and two in the US, two have already been acquired, four will be developed by their current owners and four are going nowhere fast.
Top of the reserves list are Horne 5 (6.1Moz), Hardrock (5.5Moz) and Stibnite (4.8Moz). In terms of grade, Cerro Blanco (8.5 grams per tonne), Grassy Mountain (6.8g/t) and Back River (6.3g/t) head the list. The costliest projects to develop are Stibnite ($1.3 billion), Hardrock ($952 million) and Horne 5 ($740 million) with the least capital efficient projects being Stibnite ($286.2 million/oz), Grassy Mountain ($259.3 million/oz) and Lynn Lake ($226.1 million/oz).
The lowest AISC is Horne 5 at $399/oz, followed by Camino Rojo at $543/oz and Cerro Blanco at $579/oz. At the other end of the scale, Fenix comes in at $1,042/oz. Camino Rojo has the highest IRR of 62% although it uses the highest gold reference price of $1,600/oz, followed by Premier with 51% at $1,400/oz and Bateman with 50.3% at $1,525/oz.
So much for the numbers, but which projects are likely to be built or acquired?
Six of these projects (Hardrock, Premier, Cerro Blanco, Magino, Wasamac and Mara Rosa) are already under construction, have received a positive construction decision or are under acquisition, representing 12.4Moz of aggregate production or 34.2% of the total, and potentially adding some 1.1Moz/y of production.
For all of them, 2020 was key.
Ascot Resources closed a US$105 million project financing package in December to build Premier, Argonaut Gold approved construction of Magino in October and secured up to $175 million in debt financing, Orla Mining received an environmental permit to build Camino Rojo in August, while Bluestone Resources has moved into construction of Cerro Blanco and raised much of the money to build it, as did Amarillo Gold which raised C$57.2 million to build Mara Rosa.
Two of the five projects are already subject to acquisitions, Monarch Gold announcing the sale of Wasamac to Yamana Gold in November followed by Equinox Gold announcing the acquisition of Premier Gold in December.
Both Cerro Blanco and Premier are high-grade deposits with respective reserve grades of 8.49g/t and 5.99g/t. Premier is being acquired - will Cerro Blanco be next?
The main strike against Cerro Blanco is that it is in Guatemala, a country with a recent history of mines being developed and then shut down as a result of community opposition. Tahoe Resources' Escobal silver mine was shuttered in 2017 and subsequently sold to Pan American Silver, while in 2019 Guatemala's Constitutional Court ordered the closure of the Fenix nickel mine operated by Swiss chemical company Solvay.
The Lundin group is a major shareholder of Bluestone. It is also a major shareholder of Lundin Gold which operates the Fruta del Norte mine in Ecuador, which was once considered a troubled project. Lundin Gold has shown it has a higher geopolitical risk tolerance than many other companies and as it plans on expanding beyond a single asset eventually, with few high-grade projects out there, Cerro Blanco could be a good fit.
It could take the diversification route into a large low-grade operation that Kirkland Lake Mines took with its November 2019 acquisition of Detour Gold.
Hardrock is the most expensive development project with a capex of $952 million, while the others are comfortably under $500 million. Hardrock ranks second in terms of capital efficiency at $190/oz of production after Premier at $134/oz. The other three projects come in around $200/oz. Premier and Cerro Blanco lead the IRR ranking at 51% and 34%, respectively, with Magino and Wasamac the most marginal projects with IRRs of less than 20%.
Several gold developers have updated their economic studies recently to take into account the higher gold price environment. As many of the feasibility studies have reference gold prices in the $1,200-1,300/oz range, it is evident that project economics across the board will have improved at current prices turning what were perhaps marginal projects into more viable propositions. As such, this will also indicate which projects have greater leverage to the higher gold price environment.
Orla Mining's Camino Rojo indicates the impact of updating the reference gold price with a January 2021 feasibility update, which extended the mine life, increased the reserves and boosted the estimated after-tax net present value to $452 million at a 5% discount rate with an after-tax internal rate of return of 62% at a gold price of $1,600/oz compared with a NPV of $142 million and IRR of 58.7% at a gold price of $1,250/oz in the 2019 feasibility study.
Alamos Gold's Lynn Lake project in Manitoba, Canada, would be a candidate to be dropped due to its 12.5% IRR, which is below the 15% IRR rule of thumb commonly utilised for gold investment projects, albeit this was at a $1,250/oz reference gold price. Its feasibility gave a 21.5% IRR and more than doubled its NPV at $1,500/oz gold, and so this a project with leverage to higher gold prices, and unsurprisingly Alamos is permitting the project.
The January announcement that Agnico Eagle Mines intends to expand its footprint in Nunavut via the acquisition of TMAC Resources' Hope Bay mine arguably puts it at the top of the list for potential suitors for Back River
Falco Resources' Horne 5 in the Abitibi region of Quebec, Canada, is also at the low end of the IRR scale at 15.3%, but it has a reference price of $1,300/oz, which puts it in a similar position as Lynn Lake. In October 2020, the company entered into an agreement with Glencore to process copper and zinc concentrates at its nearby Horne smelter and Falco expects to obtain all necessary permits, authorisation and financing to initiate construction in the second half of 2021. That being the case, and with reserves of more than 6.1Moz and annual production of 340,000oz/y in a very well-known neighbourhood, Horne 5 has a leading candidate for being acquired. To this end, a leading candidate is Osisko Development (OD) which was created by Osisko Gold Royalties (OGR) in November 2020 with the objective of becoming the next mid-tier gold producer. As part of its creation, OGR transferred its 18.3% ownership position in Falcon to OD. The Osisko group has historically been very active on the M&A front such as the September 2019 acquisition of Barkerville Gold Mines by OGR, and the various consolidation plays executed by O3 Mining in 2019 to build a commanding land position in the Abitibi gold district of Quebec.
From the list of 17 feasibility projects, four (Mara Rosa, Grassy Mountain, Bateman and Ollachea) with annual production of less than 80,000oz/y are too small to elicit big company interest, although they are profitable to exploit on paper and may be of interest to smaller consolidators. Together these projects represent aggregate production of 2.6Moz, some 7.2% of the total.
Of the other feasibility projects, Sabina Gold and Silver's Back River in Nunavut is arguably the most remote and presents unique challenges due to its Arctic location limiting the number of companies potentially interested in it.
However, the January announcement that Agnico Eagle Mines intends to expand its footprint in Nunavut via the acquisition of TMAC Resources' Hope Bay mine arguably puts it at the top of the list for potential suitors for Back River. With Chinese gold companies effectively scared away by the Canadian regulators' rejection of Shandong Gold's earlier bid for TMAC, other potential bidders could be scared off by Agnico increasing its presence in Nunavut on the grounds that Agnico has the greatest possibility of unlocking cost savings and synergies than any other company, or homefield advantage if you prefer. However, expanding and rightsizing Hope Bay is not going to be an easy task as Agnico chair and CEO Sean Boyd acknowledged and so the gold major may not be in any hurry to expand further in the territory.
Midas Gold's Stibnite project in Idaho, USA, is another project whose technical aspects reduce the field of potential suitors, in this instance to those with experience of refractory ore processing and/or the facilities to do so. This makes Nevada Gold Mines (NGM) joint venture the leading possible suitor due to its autoclave and roaster facilities at Goldstrike in Nevada, to the south, particularly as JV operator Barrick Gold already has an ownership position in the junior. However, if NGM were to make a move it would most likely be before Stibnite is built as the plan includes the construction of a standalone pressure oxidisation (POX) on site, capital which NGM could view as an obvious synergy.
However, there could be a twist in this tale as just prior to releasing its feasibility in December 2020, a management and board transition under the auspices of major shareholder Paulson & Co was announced with long-time president and CEO Stephen Quinn exiting the company. Is Paulson perhaps looking to build a significant gold company?
Finally there are the projects whose road to development is less certain: Ixataca, Montagne d'Or, Volta Grada and Loma Larga and are therefore cannot be seen as contenders for development or takeover until particular issues have been resolved. These projects represent 10.3Moz of aggregate production potential, or 28.4% of the total. Interestingly, these four projects number within the six most capital efficient projects.
The company with the steepest hill to climb is Almaden Minerals, whose environmental permit application for its Ixtaca project in Mexico was rejected in December 2020.
Brazil is not a jurisdiction to everyone's taste, though successful gold producers such as Yamana Gold and more recently Equinox Gold have thrived there. Volta Grande in Para is the largest undeveloped gold deposit in Brazil and while Belo Sun has obtained an environmental licence and construction licence its plans were stopped when an injunction was placed on its construction license in 2017 (subsequently upheld by Brazil's Federal Court of Appeals) until an indigenous study is updated. The company completed and submitted the study in early 2020 which included a consultation process with indigenous communities and Belo Sun is currently in the process of responding to an information clarification request from indigenous agency FUNAI.
Montagne d'Or is a joint venture between Orea Mining (44.99%) and private Russian gold producer Nordgold (55.01%) in French Guiana, which is part of France and subject to French law and permitting requirements. The company has several steps yet to navigate including renewing its mining concession, which the government has yet to do despite a December 2020 court ruling ordering it to do so within six months. The JV also has to submit studies for project improvements and modifications, navigate a French mining code reform and submit mining and environmental authorisations and construction permit applications. Fortunately for Orea, it incurs no expenditures until all permits to commence construction are granted.
INV Metals is progressing through permitting for its Loma Larga project in Ecuador, which has been designated a project of national interest. It has received an industrial water use permit and is in the environmental permitting process with the Ministry of the Environment and Water, the most significant permit required. However, the project has faced community opposition in the past including attempts to hold a referendum to ban metallic mining in the region it operates in. The company has responded by working to reduce the footprint of its proposed site and relocating some facilities to less sensitive areas. With the company having to undertake a consultation process, opposition could raise its head again.
This analysis shows there is a finite universe of feasibility stage projects in the Americas, with the better-quality projects already in development or subject to acquisition. The increase in precious metals prices has converted what were marginal projects into realistic development opportunities with some of the best leverage to higher gold prices. As such, we expect more companies to update their economic studies and run the numbers at a $1,600/oz gold price.
The review also shows there are a good handful of projects getting bogged down at the permitting stage, particularly in Latin America.