How to spot buyout clues in today's resource market

November 5, 2015 10:58 AM

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Buyout Clues—The JV Signal

One sign that a major is coveting a property is the producer's investment in developing projects. Cook points to Agnico Eagle's $15M investment in Belo Sun Mining Corp. at a 9% premium in May as significant.

Some acquirers have a pattern of taking over juniors after joint ventures. Lin points to OceanaGold as an example. "Two years ago, it took over a company called Pacific Rim Mining Corp. in El Salvador. It's very high grade and could be very easy, low-cost mining, a world-class asset. First, OceanaGold embarked on a joint venture with the company to try to fund its exploration and then the share price continued to be low, so it just bought the company out. That's a very typical story of a takeover. You do a joint venture, allowing the company to derisk the project, and then when the time is right, buy it out."

Mazumdar also sees investment such as equity placement in an exploration company as a common first date on the path to a possible acquisition. "When I worked for a major company in corporate development, we would commonly take up to a 19% stake in companies with assets that had the potential to evolve into a project worth acquiring and advancing. The stake translates to a confirmation of interest, but not necessarily a guarantee that the asset will eventually be acquired."

As a recent example, Mazumdar cites the acquisition in May 2015 of an equity stake in Gold Standard Ventures Corp. by (again) OceanaGold. "OceanaGold saw significant upside potential for Carlin-type deposits (low grade, open-pit heap leach and underground high grade) in the largest land package in the Carlin Trend not owned by Newmont Mining or Barrick Gold."

He clarifies, "We note this differs from the outright acquisition of Cayden Resources (de-listed) by Agnico Eagle Mines (Buy rated by Tony Lesiak) in 2014 for a high quality, land package (El Barqueño) in Mexico, which did not host a resource at the time."

Preston suggests watching companies with a history of doing deals. She has her eye on Eldorado Gold Corp., which bought out Sino Gold for $2B in 2009 and now owns 15% of Integra Gold Corp. "It is all about getting one foot in the door," she says.

Location, Location

Being located next door to a midtier or a major looking to grow can also weigh in the favor of a junior that could help to expand and replace ounces for a producer, according to the deal-watchers. "Many deals are obviously project dependent," Lin says. "If you are mining next to a major mine, it could be a good takeover target. That also happens during a boom in the market. The major wants to develop the mine and then it wants to buy out all the other small mines around it. Right now, the market is so weak, it's more likely to be a strategic investment for the future; assets that fit the acquirer's vision can be a value driver."

When Agnico Eagle announced the investment in Belo Sun, CEO Sean Boyd specifically called out the fact that Belo Sun's Volta Grande gold project is located in Brazil, a "favorable mining jurisdiction."

Derisked

"How derisked a project needs to be depends," says Cook. He uses the Kaminak Gold Corp. Coffee gold project in the Yukon as an example. "It is a takeout target, but a lot of questions still need to be answered about the infrastructure capex costs. The more complex the project, the more derisked it needs to be before a buyer will pull the trigger."

Preston calls derisking vital to getting a deal done. "The majors screwed up in the last bull market by buying before they knew projects were viable and management paid with their jobs. They will be much more careful this time around." She points to True Gold Mining Inc. in Burkina Faso as an example of a mine worth more than it is valued, but country risk means it needs to be more advanced before a buyer would want to pull the trigger.

"We believe that the fundamentals of the gold market imply a medium- to long-term paucity of quality projects due predominantly to the lack of exploration and development underpinned by the relevant financing risk and the limited number of projects that actually generate a decent internal rate of return (IRR) in the current gold price environment," Mazumdar says.

"Our coverage universe includes companies with gold development projects that are effectively being derisked on a technical (feasibility studies), execution (permitted and in construction basis) and financing (funded, all or partial) basis. Some of these companies, we believe, may generate an M&A bid as they are derisked to commercial production."

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