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Increase in Gold Miner M&A 'Unlikely' in Short Term

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Shareholders are not currently willing to tolerate any unnecessary spending, says one analyst.

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Although deal activity continued in the gold space last week, many miners will likely remain on the sidelines when it comes to mergers and acquisitions until at least 2014, say analysts.

Late last week, Canadian-based gold producer Alamos Gold (TSE:AGI) announced that it is acquiring Esperanza Resources Corp. (CVE:EPZ) in a deal worth $69.4 million. Alamos' bid to acquire Aurizon Mines (NYSEMKT:AZK) fell through earlier this year, with Hecla Mining (NYSE:HL) instead buying Aurizon for $796 million.

In other recent M&A news, intermediate gold miner New Gold (NYSEMKT:NGD) announced a $310 million bid to take over Rainy River Resources (CVE:RR) in June.

While KPMG says that in general, mining M&A activity in Canada shrank back toward mid-2012 levels in the first quarter, gold accounted for 64% of deal value in Q1, up from only 35% in Q4. There were 14 gold transactions announced in the quarter, representing an aggregate of $3.4 billion in deal value.

Globally, gold transactions also accounted for 47% of deal value in Q1, compared with only 20% in Q4 2012, with three of the top four gold transactions involving a Canadian company.

But in spite of recent activity, signs point to miners remaining cautious at least through the end of this year. In its April to October 2013 Global Capital Confidence Barometer outlook for the mining and metals industry, Ernst & Young said that only 24% of miners expected to pursue acquisitions in the following 12 months, with 91% expecting to see smaller bolt-on deals below $500 million.

"Mining and metals respondents are less focused on pursuing M&A opportunities compared with six months ago. This is unsurprising given the recent level of write-offs announced during the first quarter of 2013, which have stunned the industry and has taken large scale M&A off the table for now," says the report.

In its Pipeline Activity Index for May and June released this week, SNL Metals Economics Group also explains that although M&A activity is one area it expects to eventually improve, many potential buyers remain on the sidelines as "shareholders are not in the mood to tolerate unnecessary spending."

Indeed, while the lure of discounted assets may eventually become too temping for some companies to pass up -- particularly for the miners that have not been recently burned by writedowns -- Justin DesRochers, senior industry analyst with SNL Metals Economics Group, says he doesn't expect this to happen quite yet.

"I suspect that most miners will be unwilling to take on much risk at least until 2014, so their M&A increasing in the short term is unlikely. Shareholders are currently just not willing to tolerate any unnecessary spending, especially given all the recent writedowns caused by large deals in the recent past. And a major miner buying up a junior without a revenue generating mine would be considered unnecessary spending at this point, no matter how promising the project or how low the junior's share price is," he says.

Meanwhile, in the intermediate space, the biggest challenge for those companies seeking acquisitions is the recent instability in the gold price, says DesRochers.

"Many of these companies have strong balance sheets, and they are not committed to multi-billion development projects. So these shareholders are much more welcoming to growth by acquisitions. However, the recent slide in gold price definitely adds a layer of uncertainly to these plans. But I do expect this to be the sector the most active in M&A activity in the near term," he adds.

Twitter: @helenbnichols
No positions in stocks mentioned.
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