In mining circles, the Ontario town of Wawa on the shores of Lake Superior is suddenly a hot place to do business.
Wawa, home to 3,000 souls and an enormous Canada Goose sculpture, is the closest place to buy groceries if you work at the Island Gold mine, a property that has yielded 430,000 ounces of gold for owner Richmont Mines Inc. and holds something like another 1.7 million ounces of the precious metal.
Proven reserves in politically stable jurisdictions are near the top of the shopping list for acquisitive mining companies. And Wawa is the model of stability in comparison to many of the places Canadian mining companies do business, such as Tanzania, which recently hit a Barrick Gold Corp. subsidiary with an absurd $190-billion (U.S.) tax bill – that's billion with a "B" – as part of an ongoing dispute over three mines, or even Greece, where the government in dragging its feet on permits for properties owned by Eldorado Gold Corp.
The trend toward economic nationalism that helped bring U.S. President Donald Trump to power is also sweeping through regions with far less political stability than the United States, and the potential for turmoil can undermine the stock market valuation of miners that operate in these countries.
On the other hand, owning mines in countries where rule of law prevails – including Canada, Chile, the United States and Australia – means a company can expect to command a premium valuation. That stability was a big part of the rationale for a friendly $770-million (U.S.) takeover offer for Richmont Mines last week from intermediate gold producer Alamos Gold Inc.
As part of his pitch for the acquisition, which needs to be approved by Richmont shareholders, Alamos chief executive John McCluskey said the combined companies can expect a "revaluation" from investors as they become "a top 10 Canadian and North American gold producer with nearly 60 per cent of production coming from Canada." The Alamos CEO also noted the company will be one of of the sector's lowest-cost producers coming out of this transaction; the mine near Wawa produces gold for approximately $590 an ounce and the metal is now worth about $1,320 an ounce.
Mr. McCluskey is not the only CEO who sees a town such as Wawa as a great place to plant the corporate flag. At a time when mining takeovers are rare, there's speculation a rival gold miner may try to top Alamos's all-stock bid for Richmont, or that Alamos will need to sweeten its bid, as the company's share price dropped after the offer was announced.
Over all, the mining sector is still near the bottom of a cycle, with prices for most commodities bumping along at relatively low levels. Mergers and acquisition activity is muted, a stark contrast with the steady stream of deals that tend to happen when metal prices are on the upswing.
Among gold miners, the short list of recent takeovers includes Kinross Gold Corp. dropping $610-million last year to acquire a Nevada mine and joining forces this summer with Agnico Eagle Mines Ltd. on properties in Yukon, and Goldcorp Inc. spending $247-million (Canadian) in March to acquire a mine in Chile.
Contrast the location of these properties with what we saw during the last commodity boom, when the country's largest gold miners went on international adventures. Barrick Gold increased its exposure to both Africa and copper by spending $7.3-billion (U.S.) on Equinox Minerals back in 2011, and Kinross shelled out $7.1-billion to buy mines in west Africa in 2010, when it took over Red Back Mining. These two blockbusters continue to haunt the buyers.
The last takeover boom in mining saw massive deals play out in exotic locations against a theme of a global commodity boom, and it ended poorly. The current round of deal making is low-profile, and no one is going to call Wawa exotic. But the economics and the politics of the latest round of takeovers make all sorts of sense.
Andrew Willis