Junior gold miners 'provide M&A allure'

Investors seeking exposure to gold should back Australia's junior gold miners, which
will be takeover targets for larger producers pushing to expand, analysts say.
The forecast wave of consolidation in the small end of the sector will likely see
more Australian miners tie-up with offshore producers of the precious metal, Martin
Place Securities research analyst Warren Kreyzig says.
"There is definitely a trend," Mr Kreyzig told AAP.
"Gold production is diversifying.
"It used to be South Africa, Australia and United States that were the big
producers, and if you look now, it is more evenly spread among many countries.
"That trend is certainly taking Australian companies offshore.
"Australian companies in the future will have a lot more offshore operations than
they do now."
Just this week, Perth's Avoca Resources Ltd unveiled a plan to merge with
Turkey-focused, Colorado-headquartered Anatolia Minerals Development Ltd, while a
bidding war between Canadian miners for Sydney-based Andean Resources Ltd was short
lived.
Goldcorp Inc took pole position to take over Andean on Tuesday, when fellow
Vancouver-based company Eldorado Gold Corporation pulled out.
Mr Kreyzig said Argentina-focused Andean was a perfect example of a prime takeover
target for larger international gold miners, with its long-life, high quality ore
bodies.
The larger miners were seeking projects with a mine life of about 30 years and were
not interested in those expected to last less than 10 years, which described many of
Australia's small gold mines, he said.
"It's not really in any of the larger players' interest to acquire any of those
(smaller) projects unless they're thinking of amalgamating a few different
operations perhaps into one," Mr Kreyzig said.
For junior gold miners, however, the acquisition of modest assets could be
worthwhile as it had the added bonus of making a company harder to take over.
"For Avoca, their whole friendly merger is basically protection against a hostile
takeover in the future," Mr Kreyzig said.
Citi's research division this week said Thailand-focused Kingsgate Consolidated Ltd
was a potential takeover target, while Medusa Mining Ltd was set to hit the big
league by 2015 with production of 400,000 ounces per annum (ozpa) from its
operations in the Philippines.
But Mr Kreyzig was less convinced.
"Kingsgate will have to float their operations in Thailand onto the Thai stock
exchange at some point in the not too distant future, so that's certainly a
disincentive for any takeover," he said.
"And Medusa ... had very high grades initially, but they will tend to lower over
time and that's the nature of the ore body."
Citi said several 100,000 to 200,000 ozpa Australian gold juniors would "scramble to
build size and relevance" to fill the gap left by Lihir, a one million ozpa
producer, following its $10.5 billion takeover by Newcrest Mining Ltd.
The transaction increased Newcrest's dominance of the Australian gold sector with
the addition of Lihir's long-life assets.
Citi said Newcrest was 10 times larger than Australia's next biggest producer,
Pacific Rim-focused OceanaGold Corporation, which produced about 280,000 ozpa
against almost three million ozpa from an enlarged Newcrest.
"With the emergence of the small cap sector and the consolidation at the big end of
town, there is a massive void in the mid-cap gold space in Australia.
"We see the need for a company to replicate LGL (Lihir) and believe that many of the
Australian gold juniors have their eyes on the space.
"With the quality of their resource bases, none of the companies are likely to get
there through organic growth in the next few years (Medusa possibly excluded).
"Thus we believe that M&A (merger and acquisition) activity is likely to continue in
the Australian gold space."
Most analysts say there is strong outlook for the gold price, which is currently
hovering around the $US1,250 per ounce mark, down slightly from the all-time high of
$US1,265 in late June.
Surging investment demand would continue to be driven by concern about currencies,
with the US considering quantitative easing, while global supply would stay tight as
existing mine production declined and was replaced by fewer discoveries, Mr Kreyzig
said.
However, gold sector consultants Surbiton Associates recently painted a buoyant
picture for Australian gold output in the September quarter, when several operations
are slated to pour first gold.
At the big end of town, Newmont Mining Corporation's massive Boddington mine in
Western Australia continues to ramp up, while AngloGold Ashanti Ltd is expected to
complete a feasibility study on its 410,000 ozpa Tropicana project, also in WA, in
the December quarter.