Analyst: Oban’s four-way merger should inspire weary juniors

Market realities are starting to bite, and the combination of Oban Mining (TSX: OBM) with three other companies is a good model to emulate at a time when most management teams in the junior mining sector are struggling to keep their heads above water, some industry observers say.

Oban Mining recently completed a business combination with Eagle Hill, Ryan Gold and Corona Gold, consolidating ground in prospective mining camps in Ontario and Quebec, and bundling together cash reserves of $63 million.

“It’s a perfect example of what the juniors should be doing,” says Alka Singh, a Toronto-based geologist and independent mining analyst who has covered the mining sector for more than a decade. “The industry has to reinvent itself, and now is the time to consolidate.”

It’s particularly true in well-known mining camps, she says, where there are a large number of small players that have projects of perhaps 1 million oz. gold here and there, but little money to develop them.

“You can look at areas where it should be done, like the Timmins camp, the Cadillac belt, the Porcupine-Destor fault, Kirkland Lake and Nevada,” she says. “The Cadillac belt has something like ten different junior companies — they should pool their resources.”

One of the obstacles, she contends, is that often CEOs believe their projects are better than others, and they prefer to weather the downturn or try to raise money, rather than combine forces with other companies in similar circumstances.  

But Singh says shareholders can and should play a role in demanding change.

“In my opinion, it was Dundee Resources that put pressure on these guys to put everything together,” she says of Oban’s four-way merger.

With the business combination now complete, a larger and more powerful Oban has the high-grade Windfall Lake gold deposit between Val-d’Or and Chibougamau in Quebec, a 100% interest in the Roach property in northern Ontario and a 100% interest in a large area of claims in the Urban-Barry area of Quebec, along with options with other third parties to acquire a 100% interest in the Côté property, the Golden Dawn project, the Hunter property and other properties nearby. It also has an option to acquire up to a 70% interest in Northstar Gold Corp.’s Miller project in northern Ontario.

“If everyone is working on a land package the size of a postage stamp, nothing is going to get done,” John Burzynski, Oban’s chairman, told The Northern Miner in an interview in June when the proposed business combination was first made public. “You can’t generate project economics on a bulk-tonnage, low-grade target [like Malartic], for example, if you don’t have a large enough claim do it.”

Consolidation is even more critical when capital markets are depressed, he added, with juniors trading for just cents a share, and facing massive dilution if they try to raise money.

Singh warns that if consolidation doesn’t take place organically at the rate it needs to, many more juniors will be driven into the arms of private equity firms, which she says can charge as much as 8–10% interest on corporate loans.

“CEOs should not give up, but they also should be open to mergers and act more often than they are,” she says. “They must adapt and change, or they will cease to exist.”