Takeovers to ignite junior mining stocks, says E&Y study

A study published yesterday by top accountants Ernst and Young reported that almost half of the large mining companies interviewed need to make acquisitions to meet aggressive growth targets and a thumping 90 per cent said they will make an acquisition in the next two years.

Undervalued junior gold explorers and small producers are likely targets and the big mining companies are by contrast well capitalized and ready for assimilating takeover targets.

‘The global mining sector is flush with cash right now, and there’s a strong appetite for more transactions,’ Tom Whelan, Ernst and Young’s Canadian mining leader told The Canadian Press. ‘Companies in Canada and the U.S. are attractive targets because most companies in North America have a single metal focus. This makes them neat strategic acquisitions.’

The study polled the 40 top global mining groups and noted that this year will be definitive because the credit crunch in the world’s capital markets has created a new challenge for the smaller mining companies in capital raising but at the same time the demand for metals had never been stronger.

‘While the credit crunch is proving to be a challenge for the juniors, it’s not having a huge impact on the overall rate of consolidation. If anything, the rate of consolidation could accelerate in the short- to medium-term,’ Mr. Whelan added.

‘The cost of debt has soared, but we aren’t aware of any bankable transactions in the sector that haven’t been completed because of debt availability issues.’

Ernst & Young found 60 per cent of 2007 loans to the mining sector were made in the second half of the year, despite the onset of the sub-prime crisis last summer, proving that the sector remained eminently credit worthy and able to finance acquisition programs.

This report can only underline the post on this website yesterday reminding junior management to dust of its due diligence in readiness for offers. Nothing is more frustrating to a takeover approach than having accounts and valuation reports that do not stand up to due diligence.

Also the ability to extract a higher offer is greatly enhanced if you know the true value of your own hand – and can later prove it to the satisfaction of the likes of Ernst & Young.