Exclusive: Small miners size up mergers, deals may be elusive - Reuters survey

TORONTO (Reuters) - Many of the small Canadian-listed mineral explorers that supply global major miners with new projects are considering merging with peers, according to a Reuters survey, but for most it may be tough to close deals.

Just over half the Toronto Stock Exchange and TSX Venture-listed miners and explorers that participated in the Reuters survey said they are at least somewhat likely to announce a "merger of equals" over the coming 12 months, but only a handful said such a deal is "very likely."

Out of favor with investors, most explorers - or junior miners - badly need cash. And the few with strong balance sheets figure there must be some great deals around. Several industry leaders have argued that consolidation could fix the sector.

But such discussions often come to a halt when executives at target companies realize that they will have to sell cheap. Some stocks have dropped more than 90 percent over the last two years, and bids reflect the low valuations.

"The guys running these small companies are promoters. They're dreamers, and they'll hang in until the cows come home," said Tom Caldwell, head of brokerage and wealth manager Caldwell Securities. "Most would rather hang in there and end up with $10 in the treasury and start the game all over again in two years."

The fate of the juniors has implications for the broader industry and commodity markets. They drive global mineral exploration and when they succeed, often become takeover targets for bigger players.

Yet after a more than two-year funding crunch, many have scaled back or halted the exploration work that is their reason for being, and without a buyer or investor they could remain in hibernation or even risk being delisted.

While some money has started to flow back into the sector, there are some 1,600 miners and explorers on the Toronto Stock Exchange and its junior board, the TSX Venture, and competition for funds is fierce.

Nearly half the companies for which Thomson Reuters data is available had less than C$500,000 ($451,700) in cash and short-term investments at the end of the third quarter of 2013.

HURDLES ABOUND

Talk of consolidation is sure to bubble on Sunday when the world's largest mining industry gathering, the Prospectors and Developers Association of Canada convention, kicks off in Toronto. More than half the world's public mining companies are listed in Canada, and the majority are small explorers.

TomaGold Corp , which recently inked a deal with mid-tier producer Iamgold Corp to fund several years of exploration at three projects in Quebec, will be there, and Chief Executive David Grondin said a deal with some other explorer is something he is looking at. But it's not easy.

"Even though their market cap is like $2 million, they say, oh no no, my project is worth $35 million," he said. "That's mostly why it doesn't happen."

Even so, several deals have been announced in recent months, including one between Eagle Mountain Gold Corp and Goldsource Mines Inc . The combined company will focus on developing Eagle Mountain's flagship project in Guyana.

Eagle Mountain Chief Executive Ioannis Tsitos, who is set to

hand over the baton to his counterpart at Goldsource, said their deal connects his company's project with experienced managers.

A strong management team can make it much easier for companies to raise the funds needed to explore. Both companies have closed equity offerings since the deal was announced.

"We knew we had a great project and you know, the time has been challenging for everyone," said Tsitos, who will be president of the combined company. "We needed to get some skills, people who have done this, starting something at a small scale and moving into a bigger mine."

Goldsource's president, J. Scott Drever, who will be chief executive of the combined company, is also the chief executive of SilverCrest Mines Inc , a small silver producer.

COSTLY GAMBLE

For those juniors that do forge ahead with deals, the payoff could be muted, says Michael White, the head of IBK Capital, an independent investment banking firm that has worked on a range of financing deals with exploration companies over the years.

"There is a fear that you are just not going to see a merger drive value in any way," said White, adding that juniors with money are better off investing in companies or projects, as such deals boost the value of the companies they invest in, allowing them drill and create further value.

"Mergers are far more expensive and take a lot more time, so if it does not create value anyway, then who wants to do it?"

Ken Cunningham, chief executive of Miranda Gold Corp , figures it takes about half a million dollars to merge two micro-cap names. He is not sure a deal between two companies with only very early-stage projects is worth the cost.

But Cunningham is scouting for deals with other companies working in the same jurisdictions as Miranda - Colombia and the U.S. state of Nevada - especially those with cash.

"We might look at a company that has more treasury than we do and is looking to strengthen their technical team," he said.

BY THE NUMBERS

The Reuters survey was conducted in late January and early February, online and on the phone. A random sample of Toronto Stock Exchange and TSX Venture-listed mining and exploration companies were asked to participate.

The respondents are broadly representative of the publicly-listed mining companies in Canada, the majority of which are small, early-stage explorers working in Canada and abroad.

Companies were asked how likely they were to announce a "merger of equals" in the next 12 months.

Among the 61 companies that participated, nearly six in 10 said they were "somewhat likely" to announce such a deal, but fewer than one in 10 said a deal was "very likely." The results are accurate plus or minus 13 percent, 19 times out of 20.

(Additional reporting by Nicole Mordant and Julie Gordon in Vancouver, Cameron French and John Tilak in Toronto and Rod Nickel in Winnipeg; Editing by Jeffrey Hodgson and Peter Henderson)

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