While there has been an uptick in merger and acquisition activity in the mid-tier gold space, the junior end has been a little quiet.

But now Spitfire Materials (ASX:SPI) has struck its second “merger of equals” deal in less than a year and things look like they could be hotting up for the small caps.

The company tied the knot with Aphrodite Gold in December last year — after announcing the deal in August — and has now agreed to merge with Excelsior Gold (ASX:EXG).

Spitfire managing director John Young told Stockhead that there was a gap in merger and acquisition activity at the junior end of the mining sector.

“There’s quite a few other projects in the region that probably have orebodies that are 50,000 to 150,000 ounces and don’t necessarily have a home,” he said.

“The larger companies like Northern Star have got to the point now where they are looking for large scale operations and so that leaves a bit of a gap between the juniors and them.

“So we’re trying to fill that gap. Obviously if there’s funds available to people they can raise and go out on their own and continue to drill, but if funds are a bit more difficult to get to hand, then you will see a bit more of these types of deals.”

Resources analyst Gavin Wendt says the Spitfire-Excelsior deal could be the catalyst the small end of the market needs to spur M&A.

“Although we’re talking quite a booming resource sector here, the junior market is still a real challenge for companies to go out there and get funding,” he told Stockhead.

“Because not only are companies like Evolution saying we’re not really interested in 50,000 or 100,000 ounce-per-annum gold producers, the funders as well are not really interested in lending to a lot of these smaller companies.

“So if they can put a few operations together, it improves their opportunities to secure funding to complete feasibility studies, capex all of that sort of thing.”

Valuable gold

The drawcard for Spitfire is Excelsior’s sizeable “free milling” gold reserve neighbouring its own assets near Kalgoorlie in Western Australia.

Free milling means the gold can be recovered by simple concentrating methods without the need for pressure leaching or other chemical treatment.

“If you try to build a company to the point where it’s got a million ounces in reserves, the time and funds it’s going to take to get to that point is quite a long timeframe,” Mr Young said.

The two companies combined would have a resource of over 2.1 million ounces, but around 300,000 ounces of Excelsior’s resource has already been converted to a reserve.

Reserves are resources that have already been deemed economic to mine.

Excelsior’s resource is also much closer to surface than Spitfire’s Aphrodite deposit and less complex to process.

“Excelsior having potentially 300,000 ounces in reserves and if we convert 50 per cent of our current resource to reserves, we’ve got close to a million ounces,” Mr Young explained.

“And a million ounces in a reserve would be a 10-year mining operation, 100,000 ounces a year and we’d get to that point a lot quicker.”

Fast track to production

Mr Young said the deal could see the larger company begin production 12 or 18 months earlier than expected.

“If we can get a definitive study completed by June 2019, we would then be looking to finance the project in the middle of next year and then go into construction,” he said.

The merger would also result in a much lower initial capital outlay for Spitfire.

Mr Young said instead of having to build a full-scale plant that would treat both the free milling and more metallurgically complex ore, the company could take a staged-approach, which would cost less.

Following completion of the merger, Excelsior and Spitfire will begin a pre-feasibility study of the combined Aphrodite and Kalgoorlie North gold projects.

The study is slated for completion in October or November.