Welcome to the era of the micro deal.
In a transaction about as far away as one could imagine from the multibillion-dollar deals of the past great commodity boom, Barrick Gold Corp. is taking a tiny bet on a junior mining company.
On Wednesday, the world’s biggest gold producer announced a 19.9-per-cent investment in Vancouver-based Midas Gold Corp. worth US$38-million. Barrick is acquiring 46.5-million shares at $1.06 a share, a 9-per-cent premium to its Tuesday close.
It’s the latest example of a senior gold company making a so-called “strategic investment” in a junior, with the hope that it will eventually pay off in the form of much needed added production.
Over the past few years, strategic investments have grown in popularity as they offer a kind of quid pro quo rationale. Seniors make a relatively low-risk bet without jeopardizing huge amounts of capital, and juniors are able to raise money in a difficult financing environment.
It’s a strategy that’s on the rise.
Last year, 46 per cent of capital raised by junior precious-metals firms listed on the Toronto Stock Exchange came from strategic investments, with the rest through traditional bought-deal financing, according to CIBC World Markets Inc. That’s up sharply compared with 2016, when only 17 per cent of capital was raised from strategic deals.
Most of the majors are getting in on the action, with Goldcorp Inc., Kinross Gold Corp., Agnico Eagle Mines Ltd. and Kirkland Lake Gold Ltd. all announcing minority stakes in juniors over the past year.
Last year, Barrick funnelled $8.3-million into ATAC Resources Ltd. and $9.1-million into Reunion Gold Corp. Earlier this year, it invested $1.6-million into Royal Road Minerals Limited.
Midas will use the funds raised from Barrick to complete a feasibility study on its Stibnite Gold Project in Idaho, which will determine whether its gold resource is economical to mine. In a note to clients, RBC Dominion Securities Inc. analyst Stephen Walker said he sees potential for Midas to become a mid-tier gold producer by 2022, with production in the range of 300,000 ounces a year.
For Barrick, the need to replace dwindling reserves is particularly acute. Since 2011, its proven and probable gold reserves have dropped by more than 50 per cent and it doesn’t have any massive new mines coming on stream in the next few years that will move the needle significantly.
In a presentation to investors earlier this year, Barrick executive chairman John Thornton made it clear that the company will be extremely judicious in its approach to mergers and acquisitions.
Barrick’s last major transaction was a fiasco.
In 2011, it paid US$7.3-billion to buy copper producer Equinox Minerals Ltd . After a global plunge in commodity prices, Barrick was later forced to write down the value of the asset by US$3.8-billion.
Niall McGee