Goldcorp Says M&A Valuations Attractive: Corporate Canada
Goldcorp Inc. (G), the world’s second- largest producer of the metal, said mining acquisition targets are looking more attractive as tougher financing conditions have depressed share prices.
“The development-company valuations have come down to where, at least on paper, it looks like there’s some opportunities,” Chief Executive Officer Chuck Jeannes said in an interview last week. “There’s a lot of looking going on.”
Exploration and development companies, or so-called juniors, underperformed the large gold miners last year after they struggled to raise funds and investors shunned risky assets. The juniors are on average lagging the seniors again this year, even after rising 25 percent since hitting a two-year low on June 28.
The 74 companies in a Bloomberg Industries index (BBRGLDEX) of gold explorers now trade at an average 1.54 times book value, versus a three-year average of 2.58.
“A lot of the juniors have been hard up for cash, the financing window wasn’t necessarily open,” Marc Sontrop, a Toronto-based portfolio manager at Interward Asset Management Ltd., said by phone on Sept. 14. “I think we’re going to see takeover activity pick up, given the valuations.”
The Bloomberg Industries Global Explorers Gold Competitive Peers Index has fallen 15 percent this year, compared with a 2.4 percent decline in an index of 14 senior gold producers, which includes Vancouver-based Goldcorp. In that time, gold futures in New York have gained 13 percent.
“The challenge is now finding something that after thorough due diligence you would want, and finding something that the owners are willing to part with at what are historically low prices,” Jeannes, 53, said in the interview at the Denver Gold Forum. “There are things that look more attractive today than they have been for some time.”
There have been seven takeovers of gold companies worth $200 million or more announced this year, valued at $2.54 billion. That compares with nine deals valued at $11.61 billion in the same period last year.
Shares of gold explorers, which rose sharply from December 2008 to March 2011, have been “beaten down” since then, said Sonny Tahiliani, managing director at MacroMoves Capital Advisors Inc., a New York-based consultancy.
“The tide went out due to a combination of factors including overvaluation, stagnant gold price, cost escalation, new super profits taxes, funding evaporation and high profile operational hiccups by the majors, which highlighted to nervous investors the rarity of economically feasible gold deposits,” Tahiliani said by e-mail.
Jeannes said he expects gold equities broadly will outperform the metal as investors seek to take advantage of historically low valuations and producers promise to make better investment decisions. Miners including Barrick Gold Corp. (ABX), the biggest producer of the metal by market value, and Kinross Gold Corp. (K) have said they will be more disciplined in spending on projects and will target higher returns rather than output growth.
“I think there is a positive reaction to that, that’s what investors have wanted to hear, and so it’s giving them more comfort in the industry,” Jeannes said. “It’s not ounces, it’s value, and that’s always been our mantra.”
A focus on returns doesn’t exclude production growth, he said. Goldcorp is building three new mines, in Canada and Argentina, and has a joint venture with Barrick in the Dominican Republic, Pueblo Viejo, that started production last month.
The company’s cash flow per share may increase 75 percent from 2012 to 2015, according to the average of analysts’ estimates compiled by Bloomberg. In comparison, Toronto-based Barrick’s cash flow is projected to rise 9.3 percent in the same period.
Goldcorp is also prepared to sell assets that don’t fit its strategy or offer the right returns, Jeannes said. There are no “obvious candidates” for divestitures right now, he said.
The company produced 2.51 million ounces of gold in 2011 and expects output of 2.35 million to 2.45 million this year. Goldcorp raised its cost forecasts and lowered output projections on July 10, citing difficulties at the Red Lake mine in Ontario, its top producer, and water shortages at the Penasquito operation in Mexico.
Large producers are more cautious about acquisitions after “some big misses” with deals that weren’t well received by investors, Silver Wheaton Corp. (SLW) CEO Randy Smallwood said in an interview.
“The market is a bit gun-shy and there is a bit of a sentiment to sit on the cash and be a bit more patient before you go acquiring those growth opportunities,” he said in Denver on Sept. 11. “At the same time, you’ve got these undervalued equities that are screaming out that there’s some pretty good deals out there in terms of acquisitions, so I don’t see that lasting very long.”
Silver Wheaton, based in Vancouver, pays miners upfront for a discount on future production, usually to help pay for project development. Smallwood said about a third of the talks Silver Wheaton is involved in right are with companies interested in doing streaming deals to help fund acquisitions.
Detour Gold Corp. (DGC), which plans to start production early next year at its first gold mine, located in Ontario, said it’s probably seen as a takeover target. That’s because it owns a big operation in a mining-friendly region with construction nearing completion, CEO Gerald Panneton said in a Sept. 12 interview.
“I just hope it’s not soon, because it’s cheap now,” Panneton said of his company’s stock price. Detour Gold, based in Toronto, isn’t currently in any acquisition talks, he said.
As for Goldcorp, the company has “constant analysis of various things going on year-round,” Jeannes said. The company, which has mines in the Americas, would prefer to stay in the region.
“We love the relative ease of running a north-south strategy with all of our mines within four time zones,” Jeannes said. “But as I’ve said for some time, we do look all around the world -- we are the second-largest gold company on the planet by market cap and we can’t just ignore half of the planet.”
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