Gold Stocks M&A Rising, “Good News for All Gold and Silver Explorers”

GOLD STOCKS NEWS – Gold stocks continued their outperformance of the gold price on Wednesday, as the Market Vectors Gold Miners ETF (GDX) advanced $0.63, or 1.0%, to $66.26 per share in mid-day trading.  Strength in gold stocks and the GDX came despite a quiet day for the price of gold, as it hugged the flatline near $1,800 per ounce ahead of this afternoon’s Federal Open Market Committee (FOMC) announcement.  The S&P/TSX Global Gold Index, the leading gold stocks composite in Canada, climbed 0.9% to 448.55 alongside the GDX.

Notable gold stocks moving higher this morning included GDX components Barrick Gold (ABX), Gold Fields (GFI), and Royal Gold (RGLD) – which advanced 1.4%, 1.2%, and 1.0%, respectively.

With today’s gold stocks rally, the GDX rose to within 1% of its $66.98 all-time high reached on September 9.  In addition, the GDX has finally begun to display a bit of the gold price leverage that investors have been waiting for throughout the gold bull market.

Since reaching a 52-week low of $51.10 on June 16, the GDX has climbed 29.7%, compared to a 17.5% rise for the price of gold.  Thus far in September, the GDX is now higher by 5.5%, versus a 1.5% decline for the yellow metal.

While headlines in the gold stocks sector were relatively light today, earlier this week a particularly important piece of news emerged that did not receive much attention.  On Monday Agnico-Eagle Mines (AEM) announced the acquisition of Grayd Resources (GYD.TSXV), an emerging gold exploration company, for C$275 million, or C$2.80 per share. Following the announcement, GYD.TSXV surged 41.0% on Monday.

Grayd owns a 100% interest in the La India project located in the Mulatos Gold Belt of Sonora, Mexico – which happens to be approximately 70 kilometers northwest of Agnico-Eagle’s Pinos Altos gold mine.  La India hosts a National Instrument 43-101 compliant measured and indicated gold resource of 26.8 million tonnes at a grade of 0.88 gram per tonne (g/t), and an inferred gold resource of 19.7 million tonnes at a grade of 0.80 g/t.

The Agnico-Grayd transaction is the latest in a growing trend of merger and acquisition activity in the gold stocks sector.  Many large-cap gold companies (which make up the vast majority of the GDX) have struggled to generate sufficient organic growth to provide investors with leverage to the price of gold.  As a result, several have turned to acquiring their smaller rivals with far superior growth potential.

Commenting on the Grayd acquisition, Michael Churchill of Churchill Research wrote in a note to clients that “This is good news for all gold and silver explorers.”

“In retrospect, Grayd was an obvious takeout candidate,” Churchill added.  ”Its La India project in Mexico is cheap to build ($72m capex), fairly low cost to mine ($507/oz.) and well along in the approvals process. The payback period on this thing is one year at current gold prices. One of the morals of this deal is that acquirers will pay up for projects that are basically turn-key. Two other morals are that a) A one-million ounces is big enough to attract the interest of a big acquirer, and b) It’s okay to have grades below 1 g/t if the overall project economics are solid. (The grade at La India is about 0.86 g/t).”

Churchill – who has been bullish on the gold price and many gold stocks for quite some time – subsequently discussed five emerging gold explorers with similar projects to that of Grayd Resources that could be eventual takeout candidates:

Argentex Mining (ATX.TSXV) has a series of shallow, high-grade silver deposits in Argentina that it plans to heap leach. Capex is very low for these operations ($20.7 million in the PEA, though the project size needs to be expanded and that will increase the capex figure). Argentex is not as far along as Grayd, though;

Kimber Resources (KBX) is very similar to Grayd and is also in Mexico. Kimber’s project is probably better than Grayd’s (bigger and higher grade) though Kimber is not as far along. (They’re at the PEA stage.) The Kimber project also calls for very low upfront capex and quick payback;

Carpathian Gold’s (CPN.TSX) Brazilian project is very similar to Grayd’s (though not heap leach) and at a similar spot in its lifespan (actually a little further along). The Grayd takeout may cause me to raise my valuation on Carpathian’s Brazil project a little bit;

Crusader Resources (CAS.ASX) presented at the Vail conference, where I first learned of them. They are developing a project in Brazil that is a lot like Carpathian’s, though not as far along;

Orezone Gold (ORE.TSX) also is developing a fairly simple, partly heap-leach project and is pretty far advanced in the planning process. Orezone’s ounces are cheap, though the project is in Burkina Faso and projected cash costs are closer to $700/oz. (though that figure may fall in the next update of the pre feasibility study).

Churchill also noted that his Classical Insights portfolio holds positions in Grayd, Agentex, Kimber, Carpathian, and Orezone.