Many large- and mid-cap mining companies are diligently searching for more inventory as demand for gold, silver, platinum, and other special minerals outpaces supply. This inventory can be found in the shape of small-cap publicly traded mining companies that have so far resisted the lure of a takeover. Some of these smaller companies may not be able to hold out much longer.
Kinross Gold (KGC), Goldcorp (GG), and Gammon Gold (GRS) have all been particularly keen on buying smaller gold companies in order to expand their reserves. One smaller entity they have recently targeted without success is Minefinders (MFN). This company has a large gold and silver mine in Northern Mexico, which is scheduled to produce 1.7 million ounces of gold and 64.4 million ounces of silver over the mine’s prospective 15-year lifespan. With one mine already in production, and three others in New Mexico close to it, this diamond in the rough is ripe for a takeover, we think. With about a $625 million market cap, the stock looks undervalued, particularly since it is selling at a discount to its net asset value. Minefinders is suffering from growing pains. It has the potential reserves but not the sufficient financial leverage to mine them efficiently and quickly enough. Cash flow is adequate, but not outstanding, and extraction costs remain stubbornly high. All these factors point to the likelihood of another takeover bid for the company, especially since the larger gold and silver companies are running out of inventory.
Another potential takeover candidate is Yamana Gold (AUY), which has seen strong profits through the first nine months of 2010, and is doing all it can to bring its gold reserves to market with the currently high price of gold.
Some small-cap silver companies that appear ripe for an acquisition are Fortuna Silver (FVIF.PK), Bear Creek Mining (BCEKF.PK), Alexco (AXU), and First Majestic (FRMSF.PK). South American-based Fortuna gives investors exposure to rising silver prices, while ample cash flow generated from its first mine supports production at its second (San Jose) property. Bear Creek’s mines have extremely low costs of capital, which translates into very high returns on investment (70%+), and the company is, therefore, a very attractive takeover candidate. Alexco, meanwhile, is home to the well-regarded Keno Hill District mine, which is believed to have exceptional reserves. Last, but by no means least, is First Majestic, with potential peak production levels of five- to eight-million ounces per annum, it has caught the attention of the investing community, despite relatively high extraction costs.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.