Sprott’s Thoughts – In the mining sector, mergers and acquisitions can deliver rapid returns to shareholders. Investors in Cayden Resources saw their shares swell by 300% in price late last year, when Cayden received a takeover offer from Agnico Eagle Mines.
Steve Todoruk, a broker at Sprott Global Resource Investments Ltd., has been eyeing the next possible takeover. He believes he’s narrowed down the most likely targets.
In a recent note, he explains why it comes down to safety for the company making the acquisition:
I’m seeing two trends in mergers and acquisitions right now, as I look around the space for the next Cayden or the next Osisko Mining (which received a generous takeover early last year).
First off, in the last bull market, many big mining companies went after mines in higher-risk jurisdictions around the world. Today, investors are retrenching towards areas that are perceived as ‘safe’ – where governments aren’t likely to change the rules or confiscate assets. Investors are increasingly risk-averse and want exposure to mines in countries like Canada, the US, and Australia.
That’s why we’ve seen Eldorado Gold recently announce it was spinning off its Chinese assets, for instance.
The second trend we’re seeing is the strength of the US dollar relative to the Canadian dollar. If investors and mining CEOs believe this will last, then it will make sense for them to build mines in Canada. Their mining costs will be paid in Canadian dollars and they can sell their gold in US dollars. This could offer companies a bump to their bottom line, simply for building their mines in Canada.
In fact, the weak Canadian dollar is one of the few positive effects of poor resource markets. It’s a big break for mining companies that are trying to control costs now that their margins have contracted dramatically.
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