A rehash of a post i did a while back....always good to build your knowledge base and not get fooled by firms that "mine the stock market". Stick to the firms with good flagship projects, excellent share structure and proven management.
I reiterate that the below is just an opinion. Investors should always do their own due diligence and form their opinions.
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TRYING TO ATTRACT THE MAJORS
One event that can actually deliver a solid win for investors/speculators in a mining junior is a takeover - at a premium of course - by a major mining company.
However, the story doesn't always end that way, even for a junior with a great project. Sometimes a project has excellent, highly profitable characteristics, but just isn't enough to interest a major. Every project will add overhead, complexity and liability - so why bother if it won't move the bottom line?
But what's not worth the bother for a major, might interest a mid-tier with a keen eye for a specific deposit type. And even with no takeover bid at all, a good project can become the highly profitable nucleus of a new mining company.
For most juniors - i.e. companies that are typically run by geologists, not miners - a takeover by a bigger company with lots of mining experience is the obvious endgame.
So when considering buying a junior mining share, one of the key questions you guys need to ask is: "Would a major buy this? Or if its an early stage play: "If the company finds what its looking for, would a major actually buy it?". If the answer is no, it becomes much harder to conclude that the junior is worth your investment moola.
SO WHAT DO THE MAJORS WANT?
A. Favorable jurisdiction: A stable, workable tax treatment or even tax incentives - such as the cash-back programs designed to encourage exploration in Quebec, Alberta and Manitoba or recent legislative changes in relation to royalties etc.
B. Favorable geology: Districts known for big targets, such as Ontario's red lake district, the Andean Cordillera between Chile and Argentina, Ghana's greenstone belts, the Bushveld and the Nevada and Selwyn districts.
C. Infrastructure: Water, power, roads, rail, local work force, moderate elevation, proximity to end consumers, location, location, location etc.
D. Grade-tonnage: Individual project characteristics: Simple = Big and Rich [HIGH GRADE]. Shallow and near surface deposits are preferable.
However after stating the obvious above, the topic gets murky.
First off, the big base metal producers are different from gold focused companies. They might take a gold project if it is big enough, but few gold projects can match the dollar value of a large copper project. Investors will probably scratch their heads here but on the basis of gross metal value - the copper usually so far outweighs the gold in a typical copper-gold porphyry that the majors are often willing to give the gold away to the junior company that vends them the project - i.e. if they can get better terms on the copper.
Secondly, even among the major gold producers, there are variations in corporate culture and different bureaucratic criteria.
Barrick, for example, has always been willing to use its balance sheet to go out and buy the best deposits available at top dollar. Goldfields, by comparison, tends to look for a better cash-on-cash return, because it has a lower stock rating [being South African]. Rio Tinto is a value investor and has sold more mines than it has bought in recent years. Xstrata uses the tax advantages of its Swiss domicile and is probably more likely to acquire companies already in operation.
The different companies also view different deposit types and metals themselves differently. South African companies have traditionally been more acquisitive in Africa than the Americas. Xstrata has a stated aim of increasing its exposure in South Africa [Bushveld]. The Asians, of course, are buying up resources everywhere and anywhere they can get them.
That said, there are some very important factors that investors should keep in mind...
1. Permitting: To risk averse majors, this has to be the MOST IMPORTANT VARIABLE. Juniors have to at least give lip service to the issue. The majors, on the other hand, don't make little mistakes; they GO BIG or they GO HOME. So if they screw up and buy something that can't be permitted, heads will roll.
*** In the current environment of green hysteria, permits in good standing probably weigh more than formal feasibility figures. Even with the truly major projects, the majors are going to want to be as sure as possible that the projects can actually go forward [read - just ask Rio Tinto and Ivanhoe management who are operating in Mongolia]
2. Local politics: This ties closely with the above - bad politics kills permitting - but there's more to it from a major's perspective.
3. Timing: It's actually possible for a junior to price itself out of the market. If the market gets excited over a good story and pushes a junior higher than the majors will pay for what they have, the majors are more likely to let the junior keep advancing the project until the cyclical market weakness brings the price back in range. Of course, this always does not play to perfection and majors have to pay premiums way higher than usual [Read - Andean resources acquisition]
4. Detailed knowledge: Most majors actually have acquisition teams with sophisticated valuation models and very good data on the real costs of building and running various kinds of mines. And don't forget that most of the projects being advanced by juniors were once explored by the majors - i.e. they have intimate knowledge not only of the geology but local politics, water, power supply and many other variables that can either support or poison a deposit's economics.
*** A major might even, for example, buy a smaller deposit than you might expect, if its near an EXISTING MILL OR OPERATION that happens to need more of that specific sort of ore to optimize its production.
One thing is crystal clear: the majors view the whole junior sector as a source of OTHER PEOPLE'S MONEY that can be used to evaluate more projects than the majors can work on themselves. They usually farm out many of their greenfield or brownfield projects to juniors, often with claw back clauses. This allows these guys to hand off the costs of all the projects that will never go anywhere, while keeping an edge on the competition - should a junior discover something worth owning.
Barring a major discovery that would have everyone scrambling to be first in line, each major has clear cut priorities and will work its way down its own cost/opportunity curve. Majors will look to mergers as a way of acquiring producing assets; no permitting risk, no exploration risk, no metallurgical or production risk, no sweat.
Next they will look for satellite deposits. Again, the CAPEX for new mining projects big enough to interest a major is huge - hundreds of millions of dollars and sometimes billions. ***A new deposit, even if its smaller, that happens to be close to an existing operation - especially one nearing the end of its mine life - has obvious appeal. Juniors [such as MKO, CVE et al] that have staked, discovered and are advancing projects in such settings have a huge advantage; if you are a major considering two deposits for acquisition, you will go for the one just down the road and be willing to pay more for it.
The last thing you guys need to know is in considering new, greenfield discoveries. Unless something is spectacularly consistent, high-grade and in the best jurisdiction [Peru, Nevada etc] you will need to work your way down the above list and then still be very picky about which juniors' projects you take on. Size matters but it is clearly not everything.
In view of these priorities, its not so strange that the majors seem to be biding their time before snapping up juniors - even ones that have made significant discoveries. This is deliberate. The more aggressive among them may well go on a shopping spree if the junior's characteristic seasonal slump makes them cheaper than they already are.
***But sooner of later, the majors will start buying, keeping in mind the sorts of things i just commented on.
Keep this in the vault of your mind when investing.
MKO Price at posting:
25.0¢ Sentiment: Buy Disclosure: Held
