Keeping Stakes Small: How Some Companies Are Navigating the Gold Market

The Gold Report: Coeur d'Alene Mines Corp. (CDM:TSX; CDE:NYSE) recently acquired Orko SilverCorp. for cash and shares. What should investors pay attention to in that deal?

Keith Phillips: The deal involved La Preciosa, a silver asset controlled by Orko, in an attractive jurisdiction in Mexico. From an investment banking perspective, seeing two different, quality companies competing for a junior mining asset in an environment where people thought the merger and acquisition (MA) business was dead was encouraging. First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE) made an initial bid for Orko, and Coeur d'Alene was the successful bidder.

TGR: Are high-quality silver assets more likely to be targets than similarly valued gold assets in this market?

KP: There are many targets in gold but very few buyers currently. Silver is a smaller business with fewer quality targets but a relatively large number of healthy buyers. Coeur d'Alene is obviously healthy, having gone for Orko; Hecla Mining Co. (HL:NYSE) bought Aurizon Mines Ltd. to diversify into gold but also to stay in precious metals in North America. Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ), Fresnillo Plc (FRES:LSE), Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ), First Majestic and many others are well positioned to be consolidators of silver assets.

TGR: What are your thoughts on the strategy of Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE), which has been on a shopping spree this year? Agnico has taken significant positions in ATAC Resources Ltd. (ATC:TSX.V), Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL), Kootenay Silver Inc. (KTN:TSX.V) and Probe Mines Limited (PRB:TSX.V) and also bought Urastar Gold Corp. and its Mexican assets for a total of CA$10 million.

KP: Many of Agnico's friendly competitors are being cautious from an MA perspective, and I think Agnico sees an opportunity to be more aggressive and to position itself in desirable assets. I'm impressed that it continues to be opportunistic, and I think Agnico will be rewarded for staying on track.

TGR: What are some common themes in those deals?

KP: Agnico is looking broadly. The company is focused on high-quality assets it thinks it can build in regions where it is comfortable operating. The Urastar deal was a synergistic one. Urastar's core assets were near Agnico's La India project in Sonora, Mexico, so it was a natural for them. ATAC is the high-grade gold play in the Yukon.

TGR: The share prices for those juniors remain stagnant, but is that the measure of success for those deals?

KP: You can measure success from the perspective of Agnico or from the perspective of the company that Agnico is investing in. We won't know the value of these positions for Agnico for some time. For the companies that received the capital, I would differentiate them from others that had to finance in a more conventional sense, in a very difficult equity market. These companies have been able to raise capital without negatively impacting the share price.

TGR: Canada's National Bank Financial put out a note in late May that suggested that Agnico is the trendsetter of "bite-sized deals" and that we could see more of the same from other players, including New Gold Inc. (NGD:TSX; NGD:NYSE.MKT), Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE), Alamos Gold Inc. (AGI:TSX), Eldorado Gold Corp. (ELD:TSX; EGO:NYSE), Goldcorp Inc. (G:TSX; GG:NYSE) and B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX). Do you think that thesis has legs?

KP: I wouldn't rule it out. I've spent time with many of the companies on that list and know that some are uncomfortable having a small minority stake in the company because of the financial-statement implications. Agnico isn't unique; Coeur d'Alene has done something similar, which is to take several small stakes. Agnico has been more aggressive this year, but I'm not sure many others will follow its strategy.

TGR: The National Bank Financial note added that it saw potential for assets in the Americas, notably Canada, the United States, Mexico, Chile, Brazil and Peru, and also in Australia. Which jurisdictions do you favor?

KP: Each jurisdiction is unique. They are all evolving, but very few are moving in a favorable direction. The mining industry is an easy revenue target, and I can't think of many jurisdictions that are getting better for mining. We have seen permitting difficulties within Canada, in British Columbia, and there has been some pressure within Quebec on taxes and on the mining business. There's been pressure on taxes in Nevada, considered by many to be the best jurisdiction in the United States, and pressure on taxes in strong mining regions like Australia and Chile. The pressure tends to be from governments to either raise more money through taxes or to stop development all together for community reasons.

TGR: Will analysts have to raise their discount rates in some of these once relatively stable jurisdictions?

KP: I suspect analysts will be cautious in adjusting their models until the reality has changed. I wouldn't expect meaningful changes to discount rates in places like Nevada. Having said that, in a place like British Columbia, some projects will get built and some won't, and it will all be based on the merit of each project and its impact on the environment. That's the reality. Similarly, some projects in California are getting built against all odds.

TGR: Are you following any specific companies there?

KP: Golden Queen Mining Co., Ltd. (GQM:TSX) is advancing a project that is fully permitted. Pan American Silver is now drilling in California. The state is seeing modest activity; it is very much company and asset specific, but in industrialized parts of California mining is viewed as an industry to support.

TGR: What would a discount rate be on, say, Ontario; Nevada; Sonora, Mexico; Ghana; and Peru?

KP: I think everybody would use the same discount rate within Canada and Nevada and the better parts of Mexico. My guess is people would use a relatively low discount rate for Ghana, and, presumably, Peru would be higher.

TGR: National Bank Financial also shortlisted what it calls "high-quality acquisition candidates," which included Romarco Minerals Inc. (R:TSX), Balmoral Resources Ltd. (BAR:TSX.V; BAMLF:OTCQX), Belo Sun Mining Corp. (BSX:TSX.V), Minera IRL Ltd. (IRL:TSX; MIRL:LSE; MIRL:BVL), Newstrike Capital Inc. (NES:TSX.V), Rainy River Resources Ltd. (RR:TSX.V) and Torex Gold Resources Inc. (TXG:TSX). Would you agree with those names?

KP: I don't disagree with that list, but I could write one that is literally 10 times longer in five minutes, and it would be considered attractive by some group of potential buyers. The list of companies that have attractive projects that are available is long; the problem is very, very few buyers exist currently.

TGR: Do you see that changing in the gold space within the next 18 months to two years?

KP: Inevitably, the bigger companies currently focused on internal operating challenges, like Barrick Gold Corp. (ABX:TSX; ABX:NYSE) or Kinross Gold Corp. (KGC:NYSE), will come back. Nobody has a portfolio that can keep it going indefinitely; every gold company needs to review new opportunities.

TGR: So the MA thesis in the gold space isn't deadit's just a long thesis?

KP: That's right. The most critical issue is this abundance of available assets and dearth of buyers. If you have a nice asset like Rainy River Resources in Ontario, the real list of buyers is somewhere between 5 and 20 names. And those names are looking at dozens and dozens on the same list of acquisition opportunities, and out of the 20, at least half are not interested in transacting right now. [Editor's note: On 5/31/2013 New Gold Inc. announced a $310 million cash and stock deal to buy Rainy River.]

TGR: What about China? Are some of the big Chinese mining companies venturing into the small-cap space?

KP: The Chinese are always on the buy list. As a group they have not been aggressive in precious metals in North America, but we all continue to call them and try to get them interested. I know the Chinese bought Corriente Resources Inc. in Ecuador. It's a good time to be a buyer, whether you are a North American company or an international company.

TGR: Are you noticing any other trends in this and the MA space?

KP: The good news is the things that drive MA activity are CEO confidence and capital markets and financing. CEO confidence on the MA side is very low right now. But the financing market, especially debt-financing and private equity markets, is open and ready for business.

Debt-financing markets are the strongest they've been in the history of timeliterally. If you are an acquirer, you have an opportunity to use debt to finance a companyoperating companies, not project companies. Some folks are reluctant to use debt in the mining business, but I think you can use it prudently and attractively to deliver the real cost of capital.

TGR: Thanks for your insights.

Phillips was a speaker at the Society for Mining, Metallurgy and Exploration "Current Trends in Mining FinanceAn Executive's Guide" conference.

Keith Phillips is a managing director and head of Cowen and Company's Metals Mining Investment Banking Group. Phillips joined Cowen from Dahlman Rose, where he was head of the Metals Mining Investment Banking and responsible for the company's Metals Mining investment banking effort globally. Previously, he was with J.P. Morgan, where he headed the investment bank's Metals Mining practice. He previously ran the Metals Mining investment banking groups at Bear Stearns Co. and Merrill Lynch. Phillips has worked with over 100 Metals Mining companies during his 26-year Wall Street career, including established global leaders such as Rio Tinto, Vale, Barrick Gold and Peabody Energy, successful growth companies such as Goldcorp, Yamana Gold and PanAmerican Silver, as well as exploration and development stage companies such as Silver Standard, NOVAGOLD, Seabridge Gold, Guyana Goldfields and Gold Canyon Resources. Phillips received his Master of Business Administration from the University of Chicago and a Bachelor of Commerce from Laurentian University in Canada.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.


1) Brian Sylvester conducted this interview for The Gold Report and provides services to The Gold Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Sulliden Gold Corp., Probe Mines Ltd., Goldcorp Inc., B2Gold Corp., and Balmoral Resources Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Keith Phillips: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: My company acted as a financial advisor to Urastar Gold Corp in connection with its acquisition by Agnico-Eagle Mines Limited that was announced on March 25, 2013. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.