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Two engineers pour the top layer of molten gold into a basin in the Kumtor mine mill in Kyrgyzstan in this 2008 file photo.ANDREW CABALLERO REYNOLDS

After years of "Will they or won't they?" talk, 2018 may finally be the year of consolidation among Canada's intermediate gold companies.

Mergers and acquisitions in the mining industry ticked higher in 2017 compared with the year before. But deal-making activity is still a long way below the boom years.

The value of announced M&A with any involvement from a Canadian mining company was $10.7-billion (U.S.) in 2017, up about one-third from 2016, according to Thomson Reuters data. In 2011, the last big year for the industry, mining M&A exceeded $40-billion, and in 2007, a staggering $98-billion worth of deals were done – highlighted by megadeals such as Rio Tinto's takeover of Montreal's Alcan Inc.

"We've never really gotten back to those heady days," said David Cobbold, head of mining investment banking with Macquarie Capital Markets Canada Ltd.

And while we're unlikely to return to them any time soon, Mr. Cobbold said, a number of intermediate gold companies could come together in 2018 – an event that could spark a domino effect of more sizable takeover deals.

"It's been much talked about," he said. "Consolidation of a number of the intermediates could be something you see in 2018."

An intermediate gold producer usually refers to one with yearly production between 300,000 and 750,000 ounces, and with a market capitalization of about $1.5-billion to $3.5-billion.

Mr. Cobbold said the rationale for an intermediate player to merge with or acquire a competitor would typically be to increase production to that symbolic level of one million ounces a year; to have a diversified portfolio of three or four mines; and to increase trading liquidity. All of those factors can boost the attractiveness of the new "senior intermediate" to retail investors and to the dwindling field of active mutual fund managers.

"You need to be bigger to attract more of the remaining active funds," said Egizio Bianchini, global co-head of metals and mining with BMO Nesbitt Burns Inc. "They're not really playing in the little stuff. They're playing in the bigger stuff."

About 10 Canadian companies fall into the intermediate gold category, a quantity that is "a little bit unnatural," said Jason Neal, Mr. Bianchini's colleague in BMO's mining group. Since senior gold producers such as Barrick Gold Corp. have been preoccupied with cleaning up – as opposed to leveraging up – their balance sheets over the past few years, intermediates have continued on as standalone companies longer than they might have in previous mining cycles.

"[Seniors] allowed these companies to survive longer than the market typically allows them to survive," Mr. Neal said.

But gold prices have remained healthy – they topped $1,300 (U.S.) an ounce on the last trading day of the year – and some investor confidence has returned, even if the share prices of companies such as Barrick, Goldcorp Inc. and Newmont Mining Corp. remain well below their previous highs.

As for the seniors themselves doing deals in 2018?

While shareholders have made it clear they don't want to see these companies take massive risks with M&A any more, there is "more of a licence" to do deals, Mr. Bianchini said, now that much of the hard work of paying down debt has been done. Barrick, for instance, has pared down its long-term debt from more than $12-billion in 2013 to $6.3-billion, according to Standard & Poor's Capital IQ.

What's also appealing to investors, and what we're likely to see more of in 2018, are partnerships among senior companies. In 2017, for example, Goldcorp and Barrick teamed up in a 50/50 joint venture with a plan to develop the Cerro Casale and Caspiche projects in Chile, which are among the world's largest undeveloped gold projects. Through such partnerships, seniors spread the costs and risks of a project.

Another theme that bankers expect to see more of is mining companies buying assets that help reduce their geopolitical risk. In 2017, Centerra Gold Inc. bought AuRico Metals Inc. for $310-million, giving Centerra added exposure to Canada to offset some of its risk in Kyrgyzstan. Eldorado Gold Corp. paid $590-million for Integra Gold Corp., giving Eldorado exposure to Quebec. Previously, Eldorado's assets were largely outside of the Americas, in places such as Greece, Turkey and Brazil.

Senior or intermediate miners are also expected to continue taking strategic equity positions in juniors, investment bankers say. In such scenarios, a large miner typically takes a 10-per-cent to 20-per-cent stake in a smaller company, and in the process gains a board seat and a say in running the firm. In May, for example, Newmont invested $109-million to get a 19.9 per cent foothold in Continental Gold Inc. Strategic investments tend to make any future takeover of a junior by a senior company cheaper over the longer run.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 27/03/24 3:52pm EDT.

SymbolName% changeLast
ABX-T
Barrick Gold Corp
+4.22%21.99
CG-T
Centerra Gold Inc
+0.77%7.89
CNL-T
Collective Mining Ltd
+1.79%3.98
EGO-N
Eldorado Gold Corp
+2.8%13.97
ELD-T
Eldorado Gold
+2.87%18.97
G-N
Genpact Ltd
+1.39%32.76
G-T
Augusta Gold Corp
-1.94%1.01
NEM-N
Newmont Mining Corp
+3.68%35.25
RIO-N
Rio Tinto Plc ADR
+2.07%63.46
TRI-N
Thomson Reuters Corp
+0.55%155.95
TRI-T
Thomson Reuters Corp
+0.41%211.67

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