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Half-way through another annus horribilis for the gold industry, one of the most prescient calls so far has come from National Bank Financial analyst Steve Parsons. His accurate prediction in January wasn't about the direction of gold prices, but that one asset type was about to heat up: junior gold exploration firms. Given the wretched market for juniors over the past two years, this may come as a surprise to some. But it makes sense when you consider the path the gold mining business is heading down – and suggests there are more deals to be done.
Sure enough, gold companies, primarily mid-tier players, have been madly shopping for exploration firms in recent months. Toronto-based Agnico-Eagle Mines Ltd . snapped up key minority stakes of four Canadian junior gold developers and bought a fifth outright this past spring, providing much needed financing. Last month, New Gold Inc. formally offered to take over Rainy River Resources Ltd., while Teck Resources Ltd. this week bought a strategic 9.9 per cent stake in Midas Gold Corp.
Just months earlier, these tarnished trophies could barely scratch together enough financing to keep the lights on. But they have something precious to larger miners as the industry heads toward what Mr. Parsons calls an impending " production cliff."
Even before the recent swoon in gold prices, Mr. Parsons warned that the industry would be beset by a steady period of "material" production declines starting in 2017. The cause: a sharp decline in the number of discoveries of large deposits, combined with soaring exploration and development costs in more far-flung destinations, leading to concerns gold miners would struggle not just to grow production, but even replace reserves. Now the cliff looks like it could come sooner, as more projects are delayed or iced due to the falling gold price.
It's an era where survival will require a different type of strategy: rather than pursuing big, expensive, high-risk properties, miners will instead need to aggressively manage their balance sheets, scale back spending, drive more production from existing mines and secure "high-quality deposits before their peers do," Mr. Parsons said.
High quality does not mean high quantity, but rather "tuck-in" projects that are easier and cheaper to get into production, offer higher risk-adjusted returns – and, importantly, operate in stable jurisdictions that haven't been in the business of shaking down miners. Rather than spending billions, miners are likelier to spend tens of millions, or even smaller sums (by gold miner standards, at least) to buy low-risk toehold stakes in juniors.
Hence, you have Agnico's five junior plays, which are developing projects in relatively hospitable Canada, Mexico and Peru. With its takeover of Rainy River, New Gold can delay developing its $1.5-billion-plus Blackwater mine in central B.C. and focus instead on Rainy River's open pit project in northwestern Ontario. The latter is smaller than Blackwater, but it's also cheaper and easier to develop. With Teck's Midas stake, meanwhile, it gets a piece of a project in Idaho – a more amenable jurisdiction than, say, Argentina.
There are other opportunities, though they aren't limitless: Mr. Parsons recently identified just six other Canadian-listed mid-stage junior exploration firms that lacked financing but had attractive deposits, compelling development economics, experienced management and properties in friendly jurisdictions. The current environment "ultimately bodes well for companies with development assets," Mr. Parsons wrote in January. He was right – and now there are fewer of them without dance partners.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow Sean on Twitter at @seansilcoff .
Sean Silcoff