How to play the takeover game with gold stocks
Big gold firms are always on the lookout for takeovers. This U.S. advisory explains the rules and lists seven promising candidates.
In the gold rushes of old, prospectors had to defend their claims against all sorts of invaders.
Today’s prospectors — junior gold firms — are perfectly willing to give up their gold without a fight.
There is a “takeover value” at which smaller firms will yield their gold to bigger ones. But there’s no single formula for determining that value.
It has to be taken case by case, says a specialist in the field, Doug Casey’s International Speculator. This U.S. advisory closely follows the junior gold miners that populate the Toronto exchanges.
In its latest edition, the advisory outlines the general conditions that precede a takeover, assesses several takeover bids, and supplies a list of prime takeover candidates among Canadian juniors.
On the lookout
If you’re a major gold producer, or even a mid-sized one, it’s a lot easier to get somebody else to do the prospecting for you. So bigger firms are always on the lookout for junior explorers that have struck it rich.
However, writes Mr. Andrey Dashkov for the advisory, no matter how hungry a major may be, “it won’t consume just any project out there. Only the most attractive projects with the best economics catch their attention.”
Junior firms may say they want to take their projects all the way to completion, but that’s very expensive. It’s easier to “doll up” their projects with the best possible resource estimates and hope for a takeover to come along — ideally, in the form of a bidding war among the big guys.
Three things help determine who gets taken over and at what price.
Size matters
Size is the first thing that matters. “Majors produce millions of ounces of gold per year, and hence need to book millions of ounces of new ounces per year to avoid shrinking,” says Mr. Dashkov.
Any major 10 million ounce deposit is a natural candidate for a takeover, and a new discovery of around 5 million ounces with favourable economics is a contender. Smaller multi-million ounce deposits must have what this writer calls “robust economics.”
Technical risk is almost as important. “Grade is king here,” says Mr. Dashkov. “Ore of a high enough quality will pay for even the most expensive processing and will even justify significant political risk.” Other variables taken into account are low strip ratios, proximity to existing infrastructure and high recovery rates of metal from ore.
Finally, if there’s political risk, majors may demand a deep discount or even walk away altogether. “Majors are run by boards that are highly risk-averse,” says the writer. They like safe, pro-mining jurisdictions.
The advisory cites several takeover cases. We’ll highlight two of them, one complete, the other still pending.
Enormous political risk
In the first, size and high grade overcame enormous political risk. In 2008, Aurelian Resources was sideswiped with a mining ban in Ecuador, site of its Fruita del Norte property.
Its 13.7 million ounces of gold and 22 million ounces of silver were all inferred, not proven, but the grade was good. So Kinross Gold (TSX-K) stepped in and bought Aurelian — and got it at a 50 per cent discount thanks to the mining ban.
This past November, Kinross received permission to start exploration at Fruita del Norte.
In the second case, Goldcorp (TSX-G) is bidding for Canplats Resources (TSX/V-CPQ) and its Camino Rojo project in Mexico. Its opponent is Minera Penmont, a joint venture between two international biggies, America’s Newmont Mining and Fresnillo of Mexico.
Last week, Goldcorp matched Penmont’s bid with its own bid of $4.80 a share. The shares of Canplats are currently at $5.10. But why hasn’t an all-out bidding war pushed the price higher, wonders Mr. Dashkov?
While the project offers cheap open-pit heap-leach mining, costs may be steeper for some 43 per cent of the deposit. Still, it looks like a sweet deal for a sweet deposit, says the author, and there is more to come.
Seven Canadian juniors
This advisory sees seven Canadian juniors as takeover candidates.
Andina Minerals (TSX/V-ADM) has the right size — huge — and the right location, in mining-friendly Chile. Still, its Volcan project is selling cheap because the economics and recovery rates are unproven. It is liable to go at a discount unless it clears up these doubts. It trades at $2.
AuEx Resources (TSX-AUX) has seen its shares rise since it released strong pre-feasibility figures for its Long Canyon joint-venture project in Nevada. The grades and economics “make this one of our favourite projects,” says the writer, but it may be most attractive to its joint-venture partners, like Agnico-Eagle (TSX-AEM). The stock is at $3.05.
Brett Resources (TSX/V-BBR) has its big Hammond Reef project in mine-friendly Ontario and the economics look good. But so far most of its resources are in the “inferred” category. As they rise into the “measured and indicated” category, Brett becomes more attractive. It’s at $1.93.
Capital Gold Corp. (TSX-CGC) already passed through a takeover dance in 2009, but ultimately did not connect with Gammon Gold (TSX-GAM). It has mostly proven and probable resources, and the costs are not terribly high, but the size of the mine means another mid-tier like Gammon is more liable to come calling than a major firm. The stock trades at $0.98.
Exeter Resources (TSX-XRC) has a “monster” deposit in Chile that looks undervalued right now. But the technical risk is high and it could be costly. In the end, says Mr. Dashkov, there is just too much gold to be left there. A takeover bid could triple the current share price of $7.75.
Osisko Mining (TSX-OSK), with its famous Malartic mine in Quebec has a “monster project with almost no political risk.” This has made it fairly expensive. At $8.60, the stock is over the average acquisition price, and it could grow into a mid-tier firm itself if a larger fish doesn’t grab it first.
Premier Gold Mines (TSX-PG) also has its key assets at a prime Canadian site (northwestern Ontario) and a “location premium” already figures into the share price. Its resources are small, but they should soon expand with new estimates. And its deposits sit right next to Goldcorp. If Goldcorp doesn’t step in, will one of its competitors try and grab up a junior in its back yard? Stay tuned. Premier’s shares are at $4.20.
Claim jumping is a different game than it was in Klondike, and it can be a very lucrative one for investors who back the right prospectors.
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