Major and junior mining companies will be surfing in a big merger and acquisition wave (M&A) over the next several years as strong balance sheets give them more capital to pursue growth, founding partner and senior portfolio manager at Bastion Asset Management Michael Gentile said.
Gentile said three of the 35 resource companies in his portfolio have been acquired over the past 12 months, reflecting growing interest from larger producers. He expects the trend to generate fresh investment in the junior mining sector and support higher valuations.
“We’re seeing the major mining companies get a bit more aggressive on M&A because they can return capital to shareholders,” Gentile told MINING.COM host Devan Murugan on the latest episode of Top of Mine. “Their bounties are clean and still pay dividends and still have cash left over. That leaves them more firepower for growth.”
Gentile believes that with more M&A activities, there will be more flow of capital that will also improve the financing picture of the ‘average junior, lifting the companies’ valuation too.
As an investor focused more on long-term assets and strategies, Gentile sees that the markets became more open to junior mining companies in recent years. He warned that access to capital has tightened over the past three to five months, following a period when junior miners were generally able to fund their exploration programs.
“Most of the companies I’ve invested in have healthy balance sheets,” he said, adding that the recent tightening of financing conditions could benefit disciplined companies.
Golden Rule
Gentile has one central piece of advice for the junior mining companies he invests in: raise capital before it is needed, rather than wait until their exploration budgets run dry.
“When you have two years funded already, you have your drill program fully funded for the next two years and you have good results, the market is hungry to give you more capital,” he said.
“My advice to companies, if it’s on good terms and less dilutive terms, no warrants, attractive financing, you take it because this is a cyclical business.”
Gentile warned that companies often make the mistake of spending their available cash on drilling before seeking additional financing. That can leave them negotiating from a position of weakness, potentially disappointing shareholders through unfavourable financing terms.
As a long-term investor, Gentile noticed that junior mining companies are a great opportunity for those that are willing to wait.
“One of the key success factors for my companies is having sticky stable long-term capital,” he said. “So if it takes three to 10 years to go from a discovery to a producing mine or an exit or a sale to a major mining company, you need shareholders that are willing to sign up for a three to 10-year journey, not a three-week or three-month journey.”
“It’s a business of making shareholders in the company significant returns along the way.”
Watch the full episode here: