Mid-tier gold producers tussle for prime acreage in Ontario’s red-hot mining belt

Mon 11:00 am by Carrie White

Larger gold producers with cash to spare are turning to juniors in Northern Ontario with multi-million ounce, bulk tonnage deposits that could lower risk profile and boost production.

As Northern Ontario gains momentum as a highly desirable place to mine for gold, junior companies are benefiting from the merger and acquisition activity that is picking up in the region.

Indeed, larger gold producers with cash to spare are turning to juniors with multi-million ounce, bulk tonnage deposits that could lower risk profile and boost production.

Notably, three major mining takeover bids in the region occurred in mid to late 2012, beginning in April when Iamgold Corp (TSE:IMG) (NYSE:IAG) announced that it had agreed to buy Trelawney Mining and Exploration (CVE:TRR) for $585 million in cash, adding the Côté Lake gold deposit in northern Ontario to its mining portfolio.

The deal price was 42 per cent higher than Trelawney's closing price the day before the transaction was announced, and also came in at slightly north of $70 per ounce in the ground.

Months later, in mid-October, Argonaut Gold (TSE:AR) announced that Prodigy Gold (CVE:PDG) had agreed to be acquired for $341 million, with the proposed takeover providing Argonaut with the potential to reach around 500,000 ounces of gold production.

With total resources of 6.6 million ounces at Prodigy's Magino project in Ontario, Stonecap Securities analyst Brian Szeto noted that the deal was worth about US$41 per ounce.

A month later, Osisko Mining Corp. (TSE:OSK) inked an all-stock deal valued at $550 million to buy Queenston Mining (TSE:QMI) and its flagship Upper Beaver project in the Kirkland Lake region of Ontario.

The gold development junior in 2010 made a major move to take over gold explorer Brett Resources and its Hammond Reef deposit in the Atikokan area of Ontario in a friendly all-share deal worth some $372 million.

“This is a pattern that is not surprising in today's gold market, especially as growth oriented producers continually search for new gold ounces and will be drawn to safe jurisdictions with excellent infrastructure,” says Treasury Metals (TSE:TML) president and CEO Martin Walter.

“These ongoing developments will only bring further confidence to investors and ensure high-quality projects are developed in Ontario.”

Northern Ontario offers a number of advantages to mining companies, including a long history of gold production and exploration potential in a number of areas.

Adding to that is the political safety of the province, with a deep, cultural tie to the mining industry.

Mining in Canada is also advantageous as the nation has decreased the federal tax rate from 25 to 15 per cent. That, combined with an Ontario provincial tax of 12.5 per cent, makes for one of the lowest tax rates in first-world world mining jurisdictions.

A recent report titled "Mining in Northwestern Ontario: Opportunities and Challenges" analyzed the next wave of mining projects moving toward production, noting that as of April 25, 2012, when the gold price was $1,637.75 per ounce, the total value of the un-mined gold in the area was roughly $6.20 billion.

Treasury Metals

Among the production-ready projects highlighted in the report was Treasury Metals’ (TSE:TML) Goliath gold property, located in the Kenora mining district in Northwestern Ontario.

Greg Ferron, VP of corporate development for Treasury, says he thinks that there is a premium on juniors with “proven infrastructure”.

Treasury’s Goliath project not only boasts proven infrastructure, but Ferron says the company’s recent discovery, the C Zone, is “a game changer”, with the potential to add open pit ounces and reduce the stripping ratio to the project.

“There may be a trend where mid-tier producers are looking to add ‘safe ounces’ for fairly cheap,” says Ferron, adding that Northern Ontario is becoming “a completely different place” as more companies with deep pockets move into the area.

“Everyone benefits from the big companies coming in,” he notes.

Tamaka Gold

Alongside Treasury Metals, there are several worthy juniors in the Canadian gold space that stand to benefit from recent M&A activity, with Tamaka Gold being one of them. The company’s Goldlund property in Northwestern Ontario covers roughly 46,608 hectares.

Tamaka’s chief, Howard Katz, says he thinks the merger and acquisition activity in Northern Ontario reflects a new understanding of some of the deposits that are situated in the space.

“Historically, a lot of the deposits have been viewed as being candidates for narrow-veined, underground mines,” he says.

“What we have seen – the first being with Osisko and then subsequently with Detour Gold (TSE:DGC) - has really unlocked the value of these new potential bulk tonnage targets.”

Detour, in September last year, released an updated open pit mine production plan for its Detour Lake gold mine in northeastern Ontario.

The updated mine production plan supports a 21.5-year operating life with the current mineral reserve of 15.6 million ounces of gold contained in 470 million tonnes grading 1.03 grams per tonne (g/t) gold. Gold production is expected to start early this year.

Essentially, Katz says that a number of companies have been able to demonstrate their deposits are larger, bulk-tonnage plays that will make viable open pit mines.

He adds that Ontario offers prospective mining companies a number of different attributes, primarily political stability and infrastructure, which are key concerns for getting a project to production.

“A problematic theme is the rapid escalation of capital costs as it relates to building these large-scale deposits,” Katz points out. “Lack of existing infrastructure is a big driver of capital costs.”

Tamaka’s projects are situated off an existing highway, close to existing power lines and the project site has ample water supply – all important considerations for companies when looking at a project for a potential acquisition.

Katz says he thinks most companies that are able to show multi-million ounce potential, such as Tamaka, have fairly good valuations – despite a recent strain on junior markets.

“Valuations may be down from what they were before, but they are still robust and people are going to make money,” says the former investment banker, who is bullish about the money to be made in the mining industry.

In the next year, Tamaka will be focused on its planned IPO – what Katz calls a “very exciting” corporate milestone for a company that is anxious to be in the public market.

Kirkland Lake Gold

Gold producer Kirkland Lake Gold’s (TSE:KGI, LON:KGI) president and CEO, Brian Hinchcliffe, says that the gold mining industry works in complex cycles and that he and chairman Harry Dobson have developed their investment strategies by being mindful of where the industry is at any given time.

The company’s projects are located in Kirkland Lake, in the Southern Abitibi gold belt.

“We tried to combine our knowledge of the cycles and how Canada would become successful again,” Kirkland Lake’s CEO says of the search for an ideal place to start a gold mining business.

“We also looked at camps and areas with a long history of gold production – areas that were historically big producers.

“We were fortunate in acquiring Kirkland Lake for $5 million down and $20 million in the form of a capped royalty which we finished paying in October 2011.

The gold mining company is indeed expanding fast. With a staff of nearly 1,000 already, it is looking for another 250 people to hire this year as it builds up production at its Ontario properties.

Production results at Kirkland Lake so far this year have come in slightly ahead of its planned forecast to sell between 90,000 to 110,000 ounces of gold in fiscal 2013.

The expected boost comes on the heels of the company's announcement earlier this month that it had completed its service cage project at the Macassa gold mine, which gives it the ability to take production from 1,000 tonnes per day to 3,000 tonnes per day over the next 12 months.

This past summer, Kirkland Lake completed an acquisition of Queenston Mining Inc.’s (TSE:QMI) 50-per-cent interest in the seven joint venture properties the two companies owned in the Kirkland Lake camp for just $60 million.

“We think at the end of the day we’ll end up with about 2 million ounces of gold on these properties,” says Hinchcliffe.

“If that’s the case, and only the drilling will tell us that, we will have made an acquisition for a price of approximately $30 an ounce, which is an exciting place to be from an economic point of view.”

“Gold mining is a very cyclical industry – generally 7 years. So you need to have a mine life of over 15 years in order to make back your capital and generate profits. The cyclicality is why we believe you have to target a strong IRR, even higher in politically unstable jurisdictions.”

Brigus Gold

Chairman and CEO of Brigus Gold (TSE:BRD) (NYSE MKT:BRD), Wade Dawe, says he is bullish that the gold resource market has bottomed out, resulting in “some good deals” in Northern Ontario.

Brigus is an emerging mid-tier gold producer with projects in Ontario and Saskatchewan. The company's Black Fox mine located near Timmins, Ontario is currently producing gold and is on track to reach steady state production levels of 90,000 to 100,000 gold ounces in 2013.

Dawe says he thinks that the geopolitical setting in Northern Ontario is definitely a factor in the M&A activity the region has seen recently.

“There is certainly a theme of consolidation right now,” he says. “And, generally, institutions favour companies with more than one source of production.”

Dawe notes that Canada is “a safe jurisdiction” in which to mine that also boasts a skilled workforce and more lenient tax rules.

“And, if you have a company with multiple assets, it will command a higher valuation. I believe that is what is fuelling the M&A activity.”

Speaking from the perspective of a potential buyer, Dawe says that it is also cheaper to buy right now than it is to find and build an asset.

“Many juniors are trading at valuations below their replacement costs,” he notes. “And, equally important is the scarcity of quality gold deposits.”

“It just makes sense to buy,” he adds, referring to the juniors operating in northern Ontario. “A lot of the risks have already been taken out.”

Bayfield Ventures

Hoping for more M&A activity is Bayfield Ventures Corp., (CVE:BYV) (OTC:BYVVF) whose flagship Burns Block property is located Rainy River district of northwestern Ontario – an area that makes the company a potential takeover target.

The junior gold explorer's Burns Block property is located just east of Rainy River Resources (TSE:RR) multi-million ounce gold-silver deposit, and to the west of that company's expanding Intrepid zone.

The company says drilling is ongoing at the Burns Block, where it has discovered “multiple high grade chutes”. Last month, Bayfield unveiled drill results from the East Burns-Intrepid zone that included hole RR12-34W1, which intersected 25.50 metres grading 6.60 grams per tonne (g/t) gold and 34.20 g/t silver including 15.00 metres of 11.06 g/t gold and 57.05 g/t silver.

Newcastle Minerals

Another interesting company in the junior space, with the backing of a heavyweight gold miner, is Canadian junior Newcastle Minerals (CVE:NCM) – which is currently in the midst of restructuring and rebranding in a bid to raise funds for its projects in two of the prolific mining belts of Ontario.

Iamgold (TSE:IMG) (NYSE:IAG) is Newcastle’s largest shareholder with a 10% holding, and has already expressed an interest in participating in the junior explorer’s next financing.

The company’s focus is on two gold projects with large scale potential that are strategically located in the Swayze and Pickle Lake gold mining belts of Ontario. Newcastle says the properties are in “mining-friendly, politically stable jurisdictions, with excellent access and infrastructure”.

The 6,640 hectare Swayze gold project adjoins Iamgold’s multi-million ounce Cote gold project.

Newcastle’s other main focus is its 15,500 hectare Pickle Lake gold project within the Pickle Lake greenstone belt in northwestern Ontario, where more than 2.2 million ounces of gold have been produced. The property ties onto both ends of PC Gold’s Pickle Crow mine trend and the past-producing Pickle Crow mine, which produced 1.45 million ounces of gold from 1935 to 1966.