The major miners most likely to hunt for Detour Gold

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Because there has been so much bluffing between Detour Gold Corp. and activist investor Paulson & Co., any bets on whether the miner will ever hit the auction block might as well be settled by a coin flip.

But should the miner ever hang out a for-sale sign, a handful of large, respected rivals are expected to show interest, according to analysts at CIBC World Markets. At the top of the list are Barrick Gold Corp. and Goldcorp Inc.

Recent speculation on potential suitors comes after Paulson revealed Wednesday that Detour has been approached by a “major mining company” that is interested in buying it, which sent the stock 12 per cent higher. A day later, Paulson dialled up its rhetoric, announcing that “it intends to” call a special shareholder meeting to replace a majority of the miner’s board – but fell short of actually doing so.

On Thursday, Detour called the activist’s bluff. In a statement, the miner wrote that “we have heard this for many months now. If they choose to proceed, shareholders will have a stark choice – a fire sale by a U.S. hedge fund versus an experienced team executing the 2018 life of mine plan.” The stock closed down 2.6 per cent at $13.35.

Detour’s shares have largely slid for 24 months, but they were dealt a significant blow in April after the company released another disappointing revision to its mine plan, and also lowered its 2018 production guidance. The stock fell to its lowest level in three years. A month later, the miner’s chief executive departed. Paulson, which owns a 5-per-cent stake in the company, has agitated for change since.

Although a bid is far from certain, the CIBC analysts believe the four miners most likely to show some interest in Detour are Barrick, Goldcorp, Kinross Gold Corp. and one wildcard, Australia’s Newcrest Mining Ltd.. The analysis is based on the suitors' mining expertise and their current corporate strategies.

The analysts started with a list of potential suitors that are large enough to swallow Detour outright. (The target has $2.3-billion market value.) Of the 12 miners that fit the bill, most are expected to be uninterested because buying Detour would skew their production profile and shareholder base too much.

Of those large enough to remain diversified with Detour in their folds, corporate strategy or expertise ruled a number out. Newmont Mining tends to show fiscal discipline and focus on organic growth, while Kirkland Gold specializes in high-grade, underground mining. Detour operates a low-grade, open pit mine.

Of the four left, Barrick and Goldcorp, two of the world’s premier gold miners, lead the pack.

Barrick is based in Canada but currently has little exposure to its home country; its production profile is about to decline substantially; and the company “has the depth of mining experience to efficiently operate Detour,” the analysts noted. Barrick’s chair has also said recently the company could be a “discerning buyer." However, Detour’s higher cost of production may not fit with its goals.

Goldcorp, meanwhile, “appears to have the greatest potential to benefit from the acquisition of Detour in our ‘what-if’ analysis with a healthy improvement in asset mix,” the analysts wrote. Yet chief executive David Garafalo has recently focused on organic growth, declaring “we don’t need to do any M&A." Changing his tune might alarm investors. Goldcorp has also pledged to substantially lower its production costs by 2021.

As for Kinross, it has started flirting with acquisitions again after its disastrous deal for Red Back Mining in 2010, and a deal would help diversify its asset mix away from riskier jurisdictions such as Russia and Mauritania. Newcrest could be a wild card because it has stated it wants to own five tier-one ore bodies by 2020.

Barrick, Goldcorp and Kinross all declined to comment. Newcrest did not return a request for comment.