Dear Reader,

As I write, I’m on my way back from a very long trip, on which I kicked some very interesting rocks. The details are a story for another day. What I want to tell you now is that I met a geologist who is the guy in charge of winding down a major mining company’s exploration activities in the region and selling off the assets.

That’s important data. It fits a pattern we know well in in the mining industry: metals prices retreat, and the majors slash their exploration budgets, pulling the plug on all but the very highest-priority programs, firing hundreds of experienced geologists and selling off non-core assets.

A non-core asset for a major can include past-producing assets with hundreds of millions of dollars of property, plant and equipment, and advanced exploration properties with millions of ounces of gold already drilled off. Incredible as it may seem, this divestiture can include known, high-grade assets that are just not big enough to move the dial for a major or don’t fit some new corporate profile or strategy. Commodities drop, margins and dividends dwindle, shareholders crack the whip, and out the window go plenty of geological babies with the budget bathwater.

The good news is that this periodic shedding of People and Property is a true boon for the junior mining sector, which always has great need for both. It’s sort of like the annual flooding of the Nile River, refreshing the Nile Valley for another year of farming, except that we’re talking about multiyear cycles in the mining sector.

The great irony of this cycle is that the majors often end up buying back the very same assets they divest, paying hundreds of millions for rocks they sold for chump change. They must do this, because all mines are, by their nature, depleting assets. You work a mine, and every tonne or ton you remove is one less it has to offer. If you don’t replace that tonnage, you eventually run out, downsize, and ultimately go out of business.

Unless, of course, you explore and find more—but you can’t do much of that if you just fired 75% of your exploration geologists. So the majors buy the assets back, as well as the few new discoveries the juniors make, after the juniors drill them off and prove up their economics.

Some juniors fail, obviously, and so it’s common for the bean counters who run most of the majors to look at the juniors as “Other People’s Money.” They vend projects, let the juniors spend money on them and go bust on most of them, and then buy back the ones that prove up something big enough to interest a major.

It’s not so crazy when you look at it this way; however, for the juniors that do get what turn out to be the best assets, the cycle takes what often starts as a penny stock to a stock that trades at several dollars, and then gets bought out at a hefty premium by a major. This is the stuff ten-baggers are often made of.

The reason I’m writing this now is because mining has been in a down cycle for over three years now, and the major’s senior geologist’s comments made it clear to me that it’s not just his company that’s really cut its exploration to the bone. But neither his nor any major mining company wants to become a smaller one, so a major wave of purchases is in the making (if you’ll pardon the pun).

Readers who’ve been with us a while may recall that last year’s M&A activity started with a bang, with the $3 billion Osisko takeover. We haven’t seen a blockbuster deal like that yet this year, but we have seen some two major deals: Goldcorp’s $440 million takeover of Probe Mines, and Tahoe Resources $1.1 billion bid for Rio Alto Mining. The latter is of particular interest to Casey International Speculator subscribers, since we were long Rio Alto and made a tidy profit on the merger.

Now, here’s the thing: the longer the majors go with slashed exploration budgets, the greater the pressure to buy up quality assets juniors have “de-risked.” I have my eye on a number of such assets, and you should too—because the majors will need to replace the tonnage they mine this year, whether or not metals prices rebound.

Let me stress that again: for purposes of speculating on takeovers, it doesn’t especially matter if the market has bottomed or not. The majors will go shopping regardless because they have to, or they cease to be majors before long.

So what’s a good takeover target? An ideal takeover target has features we’ve discussed before:

  • Size: At least five million ounces of gold, or equivalent, or an obvious shot at delivering these sort of numbers. For base metals, you want a billion tonnes of good bulk-grade copper or more, for example. Rarely, an exceptionally high-margin project will make the grade, even if it’s not (yet) major-sized, but has clear potential to become so in the future.
  • District potential: The major will buy the deposit in hand, but it will be more keen if there’s a large land package that may host more of the same.
  • A significantly de-risked project: Solid feasibility work that gives solid evidence of future profitability or actual profit delivered to the bottom line.
  • A stable, pro-mining political jurisdiction.

To this I would add, under current market conditions:

  • A project that still looks profitable at lower gold prices—say, $1,000 gold or $2.00 copper.

Altogether, this is a very tall order, and very, very few companies have the goods. I’ve identified several and track them in the Casey International Speculator. I encourage you to do the same for your portfolio. Whether the market has bottomed or not, the stocks in strong takeover candidates are holding up better than most, but still represent a “buy low” opportunity that could well pay off this year, regardless of what metals prices do.

I obviously hope you’ll subscribe to the Casey International Speculator and consider my recommendations. I have a solid track record of predicting takeovers, like the Rio Alto one, and am sure I have more in hand. But I’ve given you the keys, so you can do this on your own, if you set tight criteria and stick with them.

Whatever you decide, best of luck.

Sincerely,

Louis James
Senior Metals Investment Strategist
Casey Research

Rock & Stock Stats
Last
One Month Ago
One Year Ago
Gold 1,202.60 1,294.18 1,322.71
Gold (SGE) 1,229.37 1,282.51 1,320.39
Silver 16.24 17.99 21.82
Copper 2.56 2.59 3.28
Oil 50.81 46.47 102.75
Gold Producers (GDX) 20.43 22.94 26.67
Gold Junior Stocks (GDXJ) 25.83 30.10 43.13
Silver Stocks (SIL) 9.44 10.97 14.69
TSX (Toronto Stock Exchange) 15,172.24 14,308.44 14,210.37
TSX Venture 694.94 671.57 1,014.93