A renaissance in Canadian gold

It’s being called a “renaissance” in Canadian gold mining.

After a decade of declining production, domestic gold mines are expected to crank out ever increasing amounts of bullion over the next five years. In painting a picture of the coming golden age, BMO Nesbitt Burns forecast Canada will crank out 7.2 million ounces of a year by 2015, a 132 per cent increase from current levels.

New gold supply will come from a combination of brand new mines – Malartic in Quebec and Detour Lake in Ontario – the first production from mines currently under development – Meadowbank in Nunavut - and expansion of properties that are already producing, such as the Red Lake mine.

From the Street’s point of view, new mines coming on stream and a bull market for bullion is a heady combination. BMO Nesbitt Burns analysts began to cover four new gold miners on Friday, all of which operate underground gold mines in Canada.

The investment dealer arm of Bank of Montreal is now tracking the fortunes of Aurizon Mines , San Gold , Lake Shore Gold and Rubicon Minerals. Its favourites in this group are San Gold and Lake Shore, based on “strong growth trajectories, potential for low-cost production and valuation discount relative to peers.”

Why take notice of BMO Nesbitt Burns’ decision to start following a handful of new gold plays, all of which are already covered by a number of other dealers?

Well, there’s a circle of life pattern among publicly traded mining companies. They start as shells, which buy claims or properties, using capital from friends and family of the executives.

A few of these plays produce promising results from drilling programs and surveys, and begin to attract investors who follow the junior mining plays. If the good news continues, analysts at the resource-focused, employee-owned dealers take note.

When a mining company is seen as potentially owning commercially viable projects, bank-owned dealers such as BMO Nesbitt Burns really start to pay attention. The profile of these companies takes off.

And that brings us to the final stage of the circle of life in Canadian mining – consolidation. Takeovers are expected to be commonplace in the gold sector, as senior players use their premium valuations to add new reserves through acquisition, rather than exploration

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