Driven by strong Asian demand, the commodities most likely to be targeted by acquirers seeking supply security are copper and iron ore. The rise in thermal and coking coal prices has also ignited interest in Aim's coal miners, where an ongoing squeeze on supply should continue to make them attractive targets.
The strongest takeover candidates are companies with large, high-grade deposits of proven reserves. These assets could be attractive due to their quality or, more probably, because the likelihood of their successful development is currently constrained by limited management skills or insufficient funds.
Centamin Egypt (CEY)
Centamin's Sukari deposit represents probably the best gold project on Aim. Large, high-grade and located on a hill, it requires little pre-stripping and is therefore cheap to mine. And ongoing deep drilling continues to increase the resource, with deeper sections typically being of higher grade, suggesting the feasibility of future underground operations to supplement the current open pit plans. Dr Brock Salier, mining analyst at Ambrian, is confident that the resource will grow at over 100,000 ounces (oz) a month, reaching a total of 15m oz of gold in the medium term.
Initial underground mining is expected to produce 80,000-120,000oz per year, which, combined with the planned 215,000oz from open pit operations, will produce around 315,000oz per year overall. Dr Salier expects medium-term expansion to provide steady-state production of well over 350,000oz per year.
Production has been delayed from late 2008 to the first quarter of 2009. Whilst disappointing, this shouldn't dampen investment appetite too much as the company continues to increase its resource at impressive rates and grades. The company is fully funded through to mine commissioning in early 2009.
Merger rationale: Gold deposits in excess of 10m oz are increasingly rare, and are generally held by majors. According to Ambrian’s Dr Salier, of the almost 20 gold deposits of 10-20m oz that have been actively mined, the nine that have produced above Centamin's initial 315,000oz per year rate are all owned by majors such as Barrick, Anglo and Newcrest. Against this background, the quality of Centamin’s asset places it firmly in the sights of resource-hungry gold majors.
International Consolidated Minerals (ICMI)
ICMI holds a large, highly prospective poly-metallic property in Peru's central mineral belt, close to some of the world's largest copper-zinc mines. ICMI's concessions cover 2,105 hectares, centred on the Pachapaqui Mine, which contains high silver grades and significant lead, zinc and copper.
During previous mining, Pachapaqui produced 1.65m tonnes (mt) of ore and, since acquiring the property in 2006, ICMI has suspended operations to upgrade facilities, increase resources and reserves, and reprocess and sell old tailings. The group is currently rebuilding the mill and management believes it can re-commence production within a year at 1,500t/day. Longer term, production could increase to 4,000t/day.
Drilling up to 2007 suggested a resource base of over 15mt, in addition to 4.2mt of proven and probable reserves. The group plans to release a Joint Ore Reserves Committee (JORC)-compliant reserve statement in mid-2008, while more recent drilling suggests considerable scope for increasing that resource base. Drilling has recently discovered gold not currently incorporated in the valuation, and has also intersected large additional zinc and copper deposits.
Merger rationale: ICMI has explored under five per cent of its property to date and only needs to realise a fraction of its potential to deliver significant share price upside. Based on just the 15mt resource so far indicated, and ignoring the recent gold find and further exploration potential, broker Fox-Davies values the group at 747p a share. The scale of the property will necessitate investment by a major partner to realise full value, and some heavyweight neighbours are already showing interest.
Angus & Ross (AGU)
Angus & Ross (named after two characters from Shakespeare's Macbeth), is striving to re-open the Black Angel zinc-lead mine in western Greenland. The craggy entrance to Black Angel perches 600m up a precipitous mountain face, to be reached by cable car, and opens over a fjord-like sound that is ice-locked for five months a year, making this arguably the most alluring mining project on Aim.
Black Angel was mined for 17 years as one of the highest grade zinc mines in the world. Significant metal resource remains and the group has identified substantial upside potential from a number of highly promising exploration prospects.
The company recently obtained a 30-year licence to mine Black Angel. Construction of the access cable car system recommenced in the spring and work on the upper terminal is planned to begin this summer. Subject to financing, mining could re-commence in early 2009. Inherited mining infrastructure should allow the group to bring production on-stream at marginal cost, generating initial annual cash flows of $44m.
Merger rationale: The group's greatest challenge is insufficient financing. It needs around £5m of equity to release a £9m tranche of debt, the combination of which should be sufficient to restore Black Angel to production. However, funds are proving difficult to secure via traditional equity routes. As a result, the group recently resorted to a three-month $1.65m loan that screams of a desperate shortage of working capital. A subsequent £3.5m placing still leaves the group looking for the balance of the project finance, which should alert astute acquirers to the possibility of getting a great asset at a bargain price.
Mano River Resources (MAN.A)
Mano River requires further funding to develop its New Liberty Gold (NLGM) and Putu (iron ore) projects, and management is "considering all options" for taking the group forward, including corporate deals.
The company has been drilling NLGM in Liberia to increase the current gold resource of 1.4m oz. It had originally planned an open pit operation, but now considers that underground mining may return greater value. The group has reorganised its diamond assets into a new company – Stellar Diamonds – which it plans to float on Aim.
Mano is targeting an iron ore resource of 900mt at its significant Putu project in Liberia, a target supported by an independent report by SRK Consulting. Development will require funding from a major investor and this project might also be spun-off into a separate company.
Merger rationale: The company recently signed agreements with Severstal, a leading Russian steel and natural resources group. Severstal will firstly invest approximately $4m for a 6.3 per cent stake in Mano with an option to increase that holding. Secondly, Severstal will pay $37.5m for a 61.5 per cent stake in the Putu Range iron ore project, and will provide the project with further funding of up to $15m. Expect to see further investment in Mano and/or its projects.
Caledon Resources (CDN)
Coking coal (used in steelmaking rather than electricity generation) is currently in huge demand, with the price having more than doubled since the start of the year. Following its purchase of the Cook coal mine in Queensland from Xstrata in late 2006, Caledon has been undertaking a production re-ramp to increase output.
Cook historically produced at a peak rate of 0.5mt per year, and Caledon aims to increase this to 1.8mt per year by 2009. Central to this plan is the introduction of “Magatar” continuous mining and haulage technology, which is used elsewhere but has yet to be proven in Australian coal mining. The Minyango project provides a “blue sky” development some 15km to the north of Cook, and the two developments have a combined coking coal resource of over 416mt.
Merger rationale: Polo Resources, the Aim-traded natural resources investment vehicle, has been snapping up Caledon shares since February and now owns over 12 per cent. The Polo board confirmed it is focused on "several attractive potential acquisition opportunities" to rapidly build a significant global coal company, and might "move rapidly and aggressively in pursuit of such acquisitions". Polo's raising of £80m via a hurried placing in early June stoked speculation that it intends to make an offer for Caledon, although with so much interest in good coal projects, other parties might also make approaches.
Metals Exploration (MTL)
The company has a 2.1m oz gold resource, plus molybdenum, at its flagship Runruno project in the Philippines. The deposit lies in a circular volcanic complex, analogous to the highly prospective Cripple Creek complex in the US. Ongoing exploration at Runruno aims to demonstrate a significant multi-million ounce gold resource capable of producing 190,000-200,000oz per year. The project looks good, but has suffered some delays. A recent concept study concluded that the gold project is viable on a standalone basis, although the molybdenum by-product could lower operating costs considerably.
Merger rationale: The 2.1m oz resource and market capitalisation of just £25m make the company one of the cheapest gold projects on Aim. Resource upgrades and further drilling and metallurgical testing, especially on molybdenum, should push up the share price before long, making the company an attractive target before fuller value is built into the pricing.
Kopane Diamonds (KDD)
Whilst focusing on developing its principal asset, the Liqhobong Main Pipe in Lesotho, South Africa, Kopane is already producing stones from a small satellite pipe. This de-risks the core asset and facilitates low cost bulk sampling of the Main Pipe.
The remaining investment questions concern the costs of recovering diamonds from the Main Pipe, whether it will be economically viable to turn this into a large-scale producer and, critically, the average stone value. The results of 2008 bulk sampling should confirm the hoped-for existence of high quality stones. The high grade of Liqhobong lowers the investment proposition and, at worst, should support a medium-sized mine. However, it could become hugely profitable if large stones are recovered.
Merger rationale: Kopane is cheap, and its share price remains depressed following residual negative sentiment from earlier failed exploration in Finland. Existing production minimises exploration risk, the existing workforce is far preferable to a start-up operation, and the Liqhobong Main Pipe offers significant upside from potentially high value large stones. With its burgeoning bank balance, Gem Diamonds leads the field of potential acquirers.
