Proven Mining Assets are the flavour of the month
Really interesting article out today talking about how the small end of the mining sector is heating up with numerous private equity firms as well as established mining players snapping up tenements where there has been extensive drilling and testing conducted, rather undertaking exploration themselves.
With prices for these assets a fraction of their value just a few years ago, many believe that there are bargains to be had now in the belief that not only will the market turn around but these assets are already a significant way down the line to being in production.
It’s something we certainly believe in at Franklin Exchange and it means that despite the market being down, the opportunities for both buyers and sellers is there in abundance! Have a read of the article, thanks to the Australian.
Proven assets going cheap trump exploration
PAUL GARVEY THE AUSTRALIAN NOVEMBER 05, 2014
A DRAMATIC slump in asset values across the resources sector has made it significantly cheaper to buy proven assets rather than carry out exploration — a phenomenon that has sparked a quiet frenzy of deal-making at the smallest end of the market.
The billions of dollars raised by small mining companies over the course of the mining boom has been funnelled into early- stage exploration projects around the world, but a drop in commodity prices and a plunge in investor interest in the sector have left those assets worth only a fraction of their previous value.
Junior companies have begun buying up assets that received tens — and in some cases hundreds
— of millions of dollars in exploration and engineering work for often piecemeal prices, accumulating projects in the hope that a future recovery in commodity prices may restore their former valuations.
Uranium company Toro Energy this week became the latest junior to follow the strategy, handing over about $3 million in shares for what should become a controlling stake in Canadian uranium assets that have been on the receiving end of more than $C125 million in exploration work in recent years.
Similarly, Crusader Resources recently paid about $800,000 for the Juruena gold project in Brazil
— where about $23m has historically been spent on exploration — while Metals X has bought the Meekatharra gold operations from Reed Resources for $9.9m. Some $117m has been spent on Meekatharra in the past.
Morgans analyst James Wilson said that for companies that believe they can survive the current downturn, there are numerous asset acquisition opportunities available.
“A lot of guys are looking to Canada, at the TSX companies, to go and pick up stuff. These were assets where a lot of money was spent during the boom times, but now they can be picked up at a fraction of the cost,” Mr Wilson said.
While the deals often do not come with headline-grabbing price tags, Mr Wilson said the activity was beginning to reach a crescendo.
“One of the companies was telling me today that they’re trying to do M&A, but they’re being beaten to the punch by private equity or other companies,” he said.“It’s not for lack of trying, but some of them are having their grass cut by others. It’s getting quite frantic.”
While price tags for exploration assets are at a fraction of the value of their historic exploration spend, the amount of money spent on exploration at a project is an imprecise measure of value even in boom times given exploration dollars are not always spent smartly or efficiently. Spending more money on exploration will not make a project that is fatally flawed any more adequate.
But buying a project that has received extensive exploration work does remove one of the biggest risks facing any early stage exploration project — namely geological vagaries.
Private equity group Denham Capital recently launched a new $170m venture called Auctus Resources which is looking to pick up unloved assets and turn them into mines.
The group’s managing director in Australia, Bert Koth, estimates that successful gold exploration results in today’s market would probably be valued at a 60 to 70 per cent discount to the money spent finding it.
“A few years back, if you discovered a copper porphyry or a gold deposit in West Africa, you’d make back 10 times your money,” he said.
“Now the market has completely shifted. When you have exploration success, in most cases the market doesn’t care and you might not even be able to make your money back even if you’re successful.”
Undeveloped iron ore deposits, he says, were once valued by the market at $10 to $12 per tonne of resource. Now those deposits are valued at about 50c per tonne.
Similarly, African gold deposits used to be valued by the market at about $40 per ounce, compared with a typical discovery cost of $20-25 an ounce. Today, those same resources are valued by the market at about $5 to $10 per ounce.
“We’re in a market anomaly where actually successfully getting something into cashflow and harvesting the cashflow for three or four years might be more successful financially than successful exploration results.”
Companies taking advantage of distressed asset prices face little prospect of generating a return from their purchases unless they can develop the deposits and get into cashflow, Koth says.
“That is a huge paradigm shift in the market. A few years ago, if you have a scoping study and an attractive deposit, you were almost guaranteed that you could sell it at an attractive valuation. That game is gone,” he said.
For many of the companies buying up exploration assets, the strategy will be as simple as getting hold of the deposits and waiting for the market to improve.
Toro, for example, has little expectation of seeing the Matoush uranium project in Canada, in which it recently acquired an interest, pushed into development soon. Instead, Toro will wait. Given the owner of Matoush, Strateco Resources, was once worth $850m when uranium prices were more favourable, the possible upside is obvious.
“When you’re at the bottom of the market, your exploration dollars are not going to bring out the same value as your acquisitions dollars,” Toro managing director Vanessa Guthrie said.
The original article can be found here thanks to the Australian.