Unloved gold sector regains shine with mergers, price spike

Merger and acquisitions in the precious metals sector are gaining momentum following Barrick’s recently announced $6.1 billion-deal to acquire Randgold Resources.

Shortly after, Canada’s Americas Silver (TSX:USA) announced it was buying Pershing Gold (Nasdaq:PGLC) for $50.78 million in an all-stock deal.

“This transaction aligns with our stated initiative of building a profitable and low-cost precious metal company in the Americas by operating and building low risk, low capital, high return projects,” Darren Blasutti, President and Chief Executive Officer of Americas Silver tells MINING.com.

Low precious metal prices had led to low trading volumes and corresponding share prices as generalist investors looked elsewhere for returns, resulting in a lack of interest in the sector from the capital markets.

At the same time, production among the world's largest gold producers has declined by around 5 percent on average over the past three years as they focused on cutting debt and costs, selling off operations that were expensive to operate, and reducing investment in exploration, projects and acquisitions.

The lack of significant capital sources has impacted good projects as they wait for funding, and Pershing Gold’s Relief Canyon project is a good example of that, says Darren Blasutti, President and CEO of Americas Silver.

“We expect this situation to turn around in the near-to-midterm as producers will inevitably have to replace their precious metal resources,” Blasutti says.

The lack of significant capital sources has impacted good projects as they wait for funding, says the executive, adding Pershing Gold’s Relief Canyon project is a good example of that. “[The asset] is a great multi-year, low capital, shovel-ready project with advanced permitting in Nevada, one of the world’s best locations for precious metals mining,” he say.” We believe it will provide further leverage to precious metals for our investors.”

Pershing’s feasibility study estimated a pre-tax net present value of approximately $120M (5% discount), capable of producing approximately 90,000 ounces of gold annually and generate post-tax cash flow of $30-35M per annum over the 6 year life (at $1,290 /oz Au).

By acquiring Pershing, Americas Silver is expected to increase precious metal production by five times and silver equivalent production to about 14 million AgEq ounces by 2020.

While mergers and acquisitions have become cheaper than expanding reserves of gold through exploration, Americas Silver does not see further acquisitions in the horizon. “The company’s philosophy has been to find value through better execution, but not event-type risk so the strategy is to remain Americas focused,” Blasutti says.

Currently, Americas Silver expects to produce between 1.6 million and 2 million ounces of silver and between 7.2 and 8 million silver equivalent ounces this year. The company, which owns multiple producing assets in Mexico, has also focused on zinc and lead as silver prices have been lackluster through most of the year.

The deal, expected to close in early 2019, comes at a time when gold prices are on their way up, hitting their highest in two months Thursday.

Spot gold gained 0.8 percent to $1,203.30 an ounce by 0947 GMT, while US gold futures added 1.1 percent at $1,206.20 an ounce.