Positioned for Takeover: Some Juniors are More Keen than Others for a Partner or Buyout

The female lion, when attempting to attract the attention of the male, adopts a seductive position: belly pressed hard to the ground, hindquarters prominently displayed, her tail swept anxiously to the side. In the animal kingdom this tempting act is known as ‘presenting’. While the actions of most junior exploration companies are not as base as this, some are keen to position themselves to best expose their assets if the right partner comes along.

The large financial burden and necessary experienced management involved in taking an exploration project to full production makes such mergers a natural and economically wise decision. The playing field has changed dramatically since many of the larger companies like Barrick Gold Corp. or Tech Cominco were first breaking ground.

“It’s a very different process,” said John E. Watson, CEO of Pan-Nevada Gold Corp. “The small minor can’t do it anymore. If you’re going to compete in that universe you have to be able to compete on a level footing with [the bigger companies]. You need an operation that’s big enough and sophisticated enough so that you can attract the right kind of people to operate it.” Last Thursday, after only four months of takeover negotiations and a near unanimous vote on March 27, Pan-Nevada Gold became a fully owned subsidiary of Midway Gold Corporation [MDW: TSX V.]. Both Watson and Midway’s President and CEO, Alan Branham have described the acquisition as mutually amiable. And it certainly is mutually beneficial, as well. Two of Pan-Nevada’s properties are conveniently located near Midway’s Spring Valley and Midway projects. The Pan Project reported over 500,000 ounces in a 43-101 compliant resource report released February 8th of this year. By acquiring full ownership of Pan Nevada’s assets, Midway has a larger resource base along with various opportunities for quick exploration and further expansion. The former Pan Nevada’s shareholders will gain 28% of one Midway share (trading at $3.36) for every Pan Nevada share held (trading at $0.84). And with that comes the benefit of security that a larger more stable company has to offer. The old real-estate adage “location, location, location” applies in the mining business, too. International PBX Ventures [PBX: TSX V.] is one junior exploration company whose location may be one of its prime advantages. PBX’s Chilean Copaquire property is positioned on the productive west fissure which supports some of the world’s largest copper-molybdenum porphyry mines. But it is not only its geological location that makes it a clear takeover target. In a classic case of “closeology”, Copaquire is fortuitously situated between several industry heavies.

The Collahuasi mine, owned by joint venture partners Xstrata, Anglo American, and Mitsui & Co., is about 20km to the east of Copaquire. The Quebrada Blanco mine, operated by Aur Resources, is 15km to the south east. Teck Cominco owns property immediately north and east of Copaquire. To the west lies Rio Tinto’s Escondida project.

Gary Medford, President and CEO of PBX, says that, regardless of the obvious fact that “there’s a good chance a much larger company will be interested in taking a run at it”, PBX is moving ahead to put the property into production itself. “The first thing is to define our resource on the property,” he said. Currently, two drill programs for molybdenum on the Cerro-Moly Molybdenum zone are in progress. Last year PBX completed drilling of a leachable copper deposit on the north side of the property and is waiting for a 43-101 resource report.

The cost of bringing a project into full production today is economically unfeasible for many juniors and most hope to catch the eye of a larger company some day. But successful companies don’t make this their primary focus. Bill McCartney, CFO of Dynasty Metals and Mining [TSX: V.DMM], says basing your whole business plan on setting yourself up for takeover is “a failing strategy.” Dynasty’s objective is to build a successfully operating company with a valuable resource. Of course, meeting that goal will most likely attract an acquirer. “But that’s not our primary objective,” said McCartney.

On Monday, Dynasty announced it had “received the last of the necessary permits from the Ecuador Ministry of the Environment to construct and operate a mill capable of processing 500,000 tonnes of ore per annum at its Zaruma Gold Project, in southern Ecuador” (April 16th news release). The mine will be the first operating large-scale mining facility in Ecuador.

This success is sure to attract attention similar to that now experienced by Eland Platinum [JSE:ELD]. The company’s South African Elandsfontein Project is within a year of production, has 15 million oz confirmed, and the capital necessary for development. Last Friday, Eland released a “cautionary announcement” that it was in “negotiations which, if successfully concluded, may have an effect on the price of the company’s shares.”

According to Investec securities analyst Leon Esterhuizen, these conditions have made Eland an attractive buyout target.

Bill McCartney feels construction of the Zaruma mill will certainly attract the same sort of attention. “It would be a contributing factor if someone was seriously looking at us,” he said.

For small companies with the inability to raise the millions needed to move a plant into production and a lack of in-house experience, the idea of a takeover becomes a more viable option. But Dynasty is confident they have what it takes to move their project into production on their own and don’t view the heavy financial costs as a major impediment. “In our case,” says McCartney, “we have a very high grade deposit [and] low capital costs. We have the experienced in-house to do it.” Later he added, “If we can develop our own projects and make them profitable why would we want to give it to someone else?”

Of course, even successful companies like Dynasty with the ability to produce on their own wouldn’t pass up a great offer from a larger company, especially if the trade-off is more valuable shares for their shareholders.

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