How to spot buyout clues in today's resource market
What if you could tell before a press release comes out that a company is poised to be bought out, possibly at a nice premium? Sounds good, right? By watching historic patterns, that might just be possible.
The Gold Report reached out to experts who have been around through enough cycles to know and asked for the clues they watch that an acquisition might be imminent. From location and early investment to derisking levels, you just have to know what to look for to position yourself for a liquidity event.
There are certain points in market cycles where buyouts just make more sense than in others.
Chen Lin, author of the popular stock newsletter What Is Chen Buying? What Is Chen Selling, sees a recent flurry of mergers and acquisitions (M&A) as an indication that we are, indeed, at the bottom of the gold market and can expect more consolidation—and at a premium. "We saw the start of a new phase of M&A happening when OceanaGold Corp. bought Romarco Minerals Inc., and Romarco shareholders realized a big premium for that," he says.
Add to that First Mining Finance Corp.'s merger with Gold Canyon Resources Inc. and PC Gold Inc. "Investors of those stocks were rewarded handsomely." He continues, "A lot of companies with good balance sheets will try to take advantage of this downturn to pick up properties at rock bottom prices. This is actually a good time for those companies that can afford to do M&A."
Lin clarifies that in many cases it is not the majors that are buying. "A lot of the big companies are in deep trouble. Many are selling assets. Barrick Gold Corp. was buying at the top of the market, and now it's selling at the bottom of the market." He is focusing on the mid-tiers like Agnico Eagle Mines Ltd, which teamed with Yamana Gold Inc. to buy Osisko Mining Corp. last year. "The pattern I see is that those companies that have good cash flow in a strong financial situation use that to buy other companies to build their assets for the next upturn."
Bob Moriarty, founder of 321gold.com, also observes that the bigger the company, the more it seems to buy at the top. "Barrick Gold, Newmont Mining Corp., Gold Fields Ltd., these guys are actually getting rid of assets. I think it's a mistake. They were buying assets at the top and paying too much, now they are selling those same assets at a big discount," he says. "The smart people are making acquisitions now at the cheapest prices in four years. Assets are basically being given away."
Moriarty also points to First Mining Finance as an example of a company taking advantage of the deals available right now. "First Mining is led by Keith Neumeyer as chairman, the same guy who started First Quantum Minerals Ltd. and First Majestic Silver Corp. He started two billion dollar companies and he is a very bright guy. I think that First Mining is going to be another big success. Neumeyer is doing all stock deals because he's hoarding his cash. He is buying gold for $20 an ounce ($20/oz) for printing up pieces of paper. That is a target that would have cost $100/oz five years ago."
For another example of a smart mid cap almost stealing a project from a major, Moriarty cites Lundin Gold Inc. picking up the $2 billion ($2B) Fruta del Norte in Ecuador for about $300 million ($300M) from Kinross Gold Corp. "The major got rid of it because they just lack the skill set to negotiate with the Ecuador government, which got greedy and wanted way too much money in taxes and essentially killed the project. Rick Rule and Lukas Lundin believe they can make it work and I believe them," he says.
Joe Mazumdar, an analyst at Canaccord Genuity, anticipates an overall increase in M&A for undervalued, quality projects in manageable jurisdictions that are advancing to commercial production; however the timing will be very suitor-specific. "Any potential suitor in the gold mining sector should be looking to fill a need and not a desire as both equity and debt holders remain wary of dilutive M&A and the consequent impairments that represent the vagrancies of the previous cycle. We believe that suitors will be seeking to fill holes in their future production profile with assets that are aligned with their comparative technical advantages in mining, processing or in permitting and financing. The asset location will also be an important factor as manageable jurisdictions will garner premiums in this market," he says.
As an example, Mazumdar cites the recent acquisition (October 2015) of the permitted, high grade Haile open pit gold project in South Carolina operated by Romarco by OceanaGold (Buy rated by Reg Spencer). "OceanaGold sought a low-cost gold project with a decent production profile, low execution risk (already permitted, in construction) and upside potential (underground)."
Mazumdar adds, "Recent M&A has also been focused on the acquisition of assets divested by major gold producers as they seek to rid themselves of non-core assets to improve their balance sheets. Note the acquisition by OceanaGold in June 2015 of the Waihi gold operation in New Zealand from Newmont Mining Corp. For its part, Newmont Mining divested Waihi but acquired the Cripple Creek gold mine in Colorado sold by AngloGold Ashanti Ltd. Cripple Creek represented a profitable operation in a stable jurisdiction that Newmont believed it could potentially improve (lower costs and improve recoveries)."
Exploration Insights author Brent Cook sees the $526M Probe Metals acquisition by Goldcorp Inc. and the $205M Cayden Resources acquisition by Agnico Eagle as flukes. "That those companies paid so much for such early-stage projects was really a surprise. More common today is vulture activity. Most majors have acquired what they could, gotten rid of what they couldn't justify and are focused on trying to survive. Some desperation deals are going on now," he says. He doesn't anticipate a rush to acquire until gold prices start to increase.
There are exceptions. "Some smart people are consolidating junior resource companies while they are on sale," Cook says. " Newmarket Gold Inc. recently acquired Australia-based Crocodile Gold in a $190M deal. Osisko Gold Royalties Ltd. is buying up Canadian explorers by funding Oban Mining Corp. Oban's game plan is to acquire as much prospective ground as possible in anticipation of a gold price increase."
Cook singles out Premier Gold Mines Ltd. as another example of smart consolidation. The North American-focused explorer and developer acquired a 40% interest from Barrick Gold in the South Arturo mine project in the Carlin Trend in Nevada in June for $20M and a few other considerations. New guidance of the project in July estimated 2016 gold production at 200,000 oz at an all-in cost of $730/oz.
In mid-October, Alamos Gold Inc. announced it was acquiring Carlisle Goldfields Ltd., which has the Lynn Lake Gold Camp in Manitoba, Canada, in an all-share deal. Alamos already owned 19.9% of Carlisle and 25% of the Lynn Lake project. Carlisle's stock price shot up some 70% after the news. Alamos' shares dipped slightly along with the news that Alamos will be significantly reducing the dividend and issuing more shares.
Gwen Preston, editor and publisher of Resource Maven, says, "Everyone with a dollar is looking. The challenge with timing the market is that the exact bottom is apparent only in hindsight and money is scarce for taking chances." She sees that fear as particularly true of the majors. "They are afraid of making a mistake so they tend to be conservative and wait until they can see a clear upward trend and then they end up buying at the top."
As proof that deals are getting done, Preston cites the announcement in early October that Inca One Gold Corp. would be purchasing Standard Tolling Co. in a share exchange.
At the same time, she sees companies like First Mining Finance and Newmarket taking advantage of the opportunity to build their companies while the market is down. Many of these moves are not takeovers of entire companies in big splashy deals, but bite-size pieces as majors throw off non-core projects and mills get sold to any willing bidder to generate cash. "A lot of confidentiality agreements have been signed and a lot of site visits are taking place," she says.
"Right now any asset that can become the next low-cost producer is an acquisition target," according to Lin. "But the asset has to make sense."