Mining stocks to see increase in M&A as pandemic dissipates

While the value of global mining mergers and acquisitions (“M&A”) has dropped over the past decade (with varying impact on mining stocks), some of the most active investment banks in the industry are of the view that deals among cashed-up mining companies are poised to pick up once lingering uncertainties from the pandemic dissipate.

Let’s back up a bit. The fact is that the COVID-19 pandemic had a devastating effect on the world economy. Yet, despite businesses suffering and economies contracting, metals prices shot up, some to levels not seen in a long time. It was of the few silver linings of the dark pandemic clouds.

Here’s a recap:

• Gold prices reached highs that they’ve last seen in 2012, and after a small consolidation, they’re still at levels far higher than any time during the past 8 years.

• Silver shot up to price levels it hasn’t seen since March 2013, and in the last year alone its price increased almost 100%.

• Iron ore has reached 10-year highs, and its currently just shy of its all time high. (Incidentally, we picked an Iron Ore stock that’s been up 300%+)

• Copper is at the highest it’s been since 2011, and, like Iron ore, is just shy of its all time high.

Typically, investors choose to increase their investment in precious metals during times of market volatility or uncertainty, and also as an inflationary hedge. It can thus be argued that the uncertainties brought about by the pandemic led to the increase in commodity prices as demand soared. However, that’s not the full story. Infrastructure spending, and the perpetual promise of elective vehicles, has resulted in increases other commodities such as Iron Ore and Copper.

Understandably, the uncertainty, lockdowns, and travel restrictions also had a significant effect on M&A in the mining and metals industry during 2020, thereby impacting mining stocks. According to a survey of mining and metals executives, as of June 2020, 33.8% of respondents indicated that the COVID-19 pandemic caused all M&A activities for these industries to be on hold as of April 2020.

The results of a survey of mining and metals executives on April 9, 2020 showed that a 33.8 percent share of the survey respondents stated that the COVID-19 pandemic had caused all merger and acquisitions activities for these industries to be on hold as of April 2020. A 21 percent share of the survey respondents saw this time as an opportunity to gain market share.

There is hope, however, and as the world starts to reopen and uncertainties from the pandemic dissipate, it’s expected that mining M&A deals will start to pick up, and naturally mining stocks will see this reflected in their share price. This post looks at the effect of the pandemic on mergers and acquisitions and what investors can expect as the industry starts gaining traction again.

The Effect of COVID-19 on Mergers and Acquisitions

Throughout the pandemic, mining, and metals companies focused on preserving capital, reducing costs, and prioritizing the operation of lower-cost assets. As a result, these companies took a cautious approach to capital spending and delayed investment decisions, while, at the same time deferring dividend payouts.

This, ultimately, resulted in fewer mergers and acquisitions with both deal value and volume declining by 31.6% and 3.8% year-on-year, respectively. Although major deals that were already in progress as the pandemic unfolded, continued to close, many others were put on hold because of the impact of COVID-19.

In other words, if it weren’t for the travel restrictions and lockdowns, there would have been for more mergers and acquisitions in the mining industry.

What Happens As the World Reopens?

As the world reopens and the doubts from the pandemic begin to wane, it’s expected that mining mergers and acquisitions will pick up again. Mining companies have built up cash reserves and are ready to expand through acquisitions.

Reopening economies bring with them a resurgent demand and supply shortfalls that are further driving up metal prices and company’s earnings to levels not seen in the past decade. As a result, the positive momentum in commodity prices will likely drive merger and acquisition activity in the industry. In simple terms, if commodity prices remain strong, it’s expected that mergers and acquisitions will follow.

Because of this, it’s expected that pent up demand for acquisitions should lead to more mining deals if the commodity prices hold up. For this reason, Bank of Montreal’s investment bank is already seeing a lot of discussions happening in relation to mergers and acquisitions, although the pace and type of deal-making varies by sector.

Effect on Gold Stocks

Many of the largest players in the gold industry are sitting on huge cash reserves because of surging gold prices. These producers are expected to buy more exploration and development companies to ensure future supply and with shareholders keen to see more consolidation.

These companies should, however, consider whether to look at investment in expanding their current operations or looking at investing in acquisitions to drive their revenue. For the moment, it looks like many will choose the former simply because prices are reaching levels that might encourage companies to build rather than buy.

Longer term, though, the industry might undergo further consolidation because it’s becoming more expensive to operate and build mines due to declining ore quality and rising social and environmental expectations. In this scenario, it makes more sense to acquire other operations to ensure future supply and revenue.

Either way, it will ensure their profitability for some time and signals a probable bullish market for gold stocks.

In addition, according to Goldman Sachs, the 12-month target price for gold in November is $2300. This is built on a forecast for rising expectations and concerns around the longevity of the US dollar as a reserve currency. And because gold is priced in dollars, the gold price typically tends to rise if the dollar weakens against international currencies.

Still, Goldman Sachs chief commodity strategist Jeffrey Currie in mid-November reiterated his $2,300 12-month target for gold. His bullish case for the gold price is built on a forecast for rising inflation expectations and “concerns around the longevity of the U.S. dollar as a reserve currency” amid huge deficits and rising debt. Because gold is priced in dollars, the gold price will tend to rise if the dollar weakens against international currencies, all else equal.

Likewise, Bank of America predicts an average price of $2063 for 2021. This, ultimately, means that, as the gold price increases, so will the revenue of mining companies, their value, and their stock prices.

In April, Bank of America put a $3,000-per-ounce 18-month price target on gold. However, Bank of America reassessed in November, predicting an average price of $2,063 for 2021. The firm turned neutral on gold amid belief that super-effective vaccines and stimulus would produce a strong cyclical recovery and push up long-term interest rates. Those conditions favor industrial metals over precious metals, the bank said.

As a result, the prospect of an upswing in M&A means now might be a good time to invest in mining penny stocks. Simply put, these stocks offer investors several advantages compared to higher priced blue-chip stocks.

These include:

• Broader diversity to investments, or in other words, one is able to spread their investment over several lower priced stocks.
• Greater volatility which means that price moves are bigger, and, in the right circumstances lead to higher returns.
• Price moves can be quicker which means returns are realized faster compared to higher priced stocks. It may take a mining stock a couple of years to increase 100%, while majors may never see price appreciation to that extent.

These benefits are especially true for companies which are acquired during the merger and acquisitions process. The spikes in the stock price of a company in the M&A transactions can bring investors extraordinary returns, with little cash investment. In some instances, these returns are materialized quicker. In simple terms, investors make more money faster.

Two Options to Consider

For investors looking at mining stocks, TSXV and CSE offer a variety of options. For two standout options, we remain bullish on Nexus Gold Corp (TXSV:NXS) and Etruscus Resources (CSE:ETR).

Nexus Gold Corp (TSXV:NXS) – District Scale Gold Assets in West Africa and Canada

NXS has an astounding 11 properties with almost all of them 100% owned. With 750 sq km of district scale property in West Africa and six properties in Canada, NXS is also one of the cheapest by market capitalization when compared to their competitors. NXS currently trades at about $0.065 but is worth $0.24.

Etruscus Resources (CSE:ETR): Undervalued Gold-Silver deposit in BC’s Golden Triangle

ETR is one of the cheapest mining stocks available in the Golden Triangle today. The Golden Triangle is home to a number of huge mines and, in 2020, companies located there saw an average price increase of 227%. ETR currently trades at $0.335, but is worth $1.02.

It’s clear that both these offer excellent investment opportunities which will realize significant returns based on their value alone.

Final Thoughts

With the world reopening, pent up demand will drive higher prices and many mining penny stocks will benefit from majors that will look at M&A as a strategy to ensure future growth, profitability, and to deliver on their fiduciary duty to their shareholders. Those seeking high returns absolutely need to explore small/mid-cap companies, as this is a sure way to generate abnormal returns (in many instances far exceeding 100%).