Mining minnows merge to lure a big-league catch

Small Canadian mining companies are rushing to groom themselves to attract big-league suitors, experts say, a trend underscored by a wave of consolidation among junior explorers and producers.

Flush with cash and confidence spawned by robust commodity prices, the miners want to capitalize on vibrant investor interest.

Mergers are a way for the miners to bulk themselves up into mid-tier producers, ready to attract the voracious appetites of the world’s mining titans.

“You saw in the last year and a half, all the bigger companies get eaten by the (even) bigger companies. And there are no, now, middle-tier gold producers,” said Prospectors & Developers Association of Canada director Steve Vaughan.

“You find that the smaller gold producers are, as fast as they can, accumulating smaller companies to get in the mid tier so they can be eaten by the bigger ones.”

This week, for example, marked the marriage of Exall Resources with Southern Star Resources to form a new C$400 million ($357 million) gold explorer called Gold Eagle Mines.

“You’re beginning to see the seniors now dip into the intermediate pool, the small-scale producers. So the juniors, in preparation for the next wave coming down, have to get themselves into position. It’s not necessarily a bad thing to be a takeover target,” said Darin Wagner, president of gold explorer West Timmins Mining.

West Timmins itself is the product of a recent merger between Sydney Resource Corp. and Band-Ore Resources Ltd.

“In some respects it’s a little bit of grooming,” he said. “You want to be there, you want to be noticed by investors and by majors. You want to be able to be one of the players in the game.”

The pace of consolidation is increasing and will continue to accelerate, he said. Strong commodity prices, increasingly scarce and costly talent, and the pressures and costs of making a discovery are all triggers for such deals.

A bigger company will provide easier access to capital and an increasingly receptive investor base, observers note.

DEALS ON THE RISE

To date this year, the number of merger and acquisition deals targeting Canadian miners worth less than $100 million has risen 62 percent over the same period in 2005, according to financial data tracker Dealogic. The value of the deals has surged 150 percent to $1.5 billion.

And while deals in the gold sector dominate headlines due to investor interest, consolidation is increasingly seen among nickel, diamond, and uranium miners, Vaughan said.

Like their big brothers, the juniors know it’s “eat or be eaten,” he said. “I know of nobody in this business that is not willing to be taken out at a profit.”

The consolidation, however, is not spurring fears that such deals will hollow out Canada’s thriving junior mining sector.

“To borrow an analogy from the forestry industry, the mining industry is like a giant tree,” said Michael Jones, president of Platinum Group Metals.

“Perhaps the mature branches are getting pruned at the top, but the bottom part of the business has very firm roots and they’re dug in deep and they’re growing very strongly.”

Jones, whose firm is focused on developing platinum in Canada and South Africa, said the junior sector is dynamic.

“The promoters and founders of these companies … have precious metals in their blood. If you look at some of the guys who have made very significant amounts of money personally, you’d expect them to be on a beach drinking mai tais. And they’re not” he said. “Six months later, Newco is up and listed and they’re busy with it.”