Growth for the sake of growth is over, but that doesn't mean mergers and acquisitions in the mining space are finished, says Ian Parkinson, director of equity research-mining with GMP Securities L.P.
Parkinson expects a fresh round of takeover bids for underperforming single asset producers and developers that could move the needle for state-owned enterprises and multinationals. In this interview with The Gold Report, we picked Parkinson's brain for some likely targets.
Ian Parkinson joined the GMP mining research team in November 2012 and has been a sellside mining analyst since 2006. He joined the analyst community after a successful 10-year career in industry with Falconbridge and Noranda.
During Parkinson's time in industry he worked on a wide range of exploration, development and commercial interests, which include the Craig and Onaping depth discovery, Raglan mine, Lady Loretta and business development for the zinc business unit at Noranda. Parkinson is an earth science graduate of Laurentian University in Sudbury, Ontario, where he was born and raised in a mining family.
Ian Parkinson: We're using $1,350 per ounce ($1,350/oz) gold, flatlined. On the copper side, we have a $2.85/pound ($2.85/lb) long-term copper price, but this year and next we're forecasting $3.30/lb. We see the copper price being range bound above $3/lb and then trending down to $2.85/lb, which is probably toward the bottom of the Street's consensus.
TGR: What are your thoughts on recent copper consumption data from China?
IP: It's not as robust as we would like, but London Metals Exchange (LME) data suggests copper inventory levels are being drawn down almost daily. LME warehouses in June and July 2013 had well over 600,000 tons (600 Kt)—they are now below 200 Kt.
There isn't a huge stockpile of copper available to disrupt the market. We're seeing cash to three-month spreads tighten, which means nearby copper is being priced higher than three-month material. Without any major changes in China, we see this being the price range for the next year or two.
TGR: Can the companies that you cover make money at current gold and copper prices?
IP: Yes. I have a positive outlook on most of the base metal names that I cover using a long-term copper price that's below today's spot price. But those companies need to be prudent.
TGR: What's the average margin with the companies you cover in the base metals space?
IP: On a cash-cost basis, low costs would be in the $1.30–1.40/lb range, and then higher costs would be around $2/lb. That would be only the site costs. Adding offsite costs—transportation, etc.—could raise costs to $2.30–2.40/lb. Today's copper price is sustainable for most producers. At $3.15/lb copper, even a non-best-in-class copper producer is going to generate $0.50–0.60/lb margin.
The real question is: Is the current copper price substantial enough to overcome the lofty capital expenses developers face?
TGR: What type of margin are companies typically generating at $1,300/oz gold?
IP: It varies. Some companies I cover have cash costs in the $600–700/oz range, but when we factor in everything else, we quickly get to all-in sustaining costs of $1,000–1,050/oz. That's the rationale for the all-in sustaining cost reporting—so people can more easily determine the margin. We are seeing all-in sustaining costs around $1,000/oz for a lot of producers.
TGR: You believe mining equity investors will see an onset of "macrocentric" merger and acquisition (M&A) activity in the sector in 2014. Would you please elaborate?
IP: I believe that we will definitely continue to see M&A, but there may be some debate as to whether it's purely macrocentric. I think it's the right time for M&A. If we go back several years, there was growth for the sake of growth. I see things being more opportunistic now. We've seen it already with Goldcorp Inc.'s takeover bid, and subsequent bids, for Osisko Mining Corp.
TGR: What types of companies will drive this kind of M&A?
IP: I think it's going to be a marriage between a balance sheet and a project, perhaps from state-owned enterprises, the typical Chinese buyer or large multinationals seeking growth. Pre-cash flow projects can be thought of as cheap exploration. There are a substantial number of junior mining companies with market caps that are smaller than what they have sunk into the ground.
The market is not giving much value to these development or explorer stories because the opportunity to raise development capital in the junior market is not there, except for something special. It's an opportunity for the large, Western, publicly traded mining companies or state-owned enterprises with decent balance sheets and a focus on growth to step in and say, "We will take that off your hands."