How to spot buyout clues in today's resource market

November 5, 2015 10:58 AM

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Naming the Targets

All of our experts have watchlists of companies they think could be acquirers and acquirees in the coming months. Lin doesn't think OceanaGold is done shopping yet. Like Mazumdar, in the wake of the Pacific Rim, Romarco and the Waihi gold mine deals, Lin took notice when OceanaGold announced a joint venture agreement with Gold Standard Ventures. "OceanaGold put in money to acquire 14.9% of Gold Standard Ventures as a premium to the share price and it is still buying Gold Standard Ventures stock on the open market. That's a typical sign, the interest of a major company in a junior," Lin says.

"Gold Standard Ventures is currently drilling the south part of the deposit. Drillers already found a deep sulphide-based gold deposit on the north side. It's wide open space. There are lots of possibilities. Management now has a lot of capital to do exploration thanks to the recent investment from OceanaGold. That makes it an attractive takeover target."

Lin is watching a few other candidates that could be buyout targets. "One of my favorite stocks, Pretium Resources Inc., is developing its mine in northern British Columbia. It is very high grade, low cost. So that will be a nice takeover target for other companies, either in the development stage or after it gets into production. The mine looks so good I think any gold major with the ability would like to buy it."

"One exploration company that is very small right now, but just had a nice discovery and could be a takeover target, is Alexco Resource Corp. in the Yukon," says Lin. "It is its own high-grade silver district. At some point, I think a bigger company will come in because it has huge potential."

Moriarty is closely watching one with a number of very pressing clues. "As a condition of a funding last year, IAMGOLD Corp. pledged to use $500M in capital expenses or acquisitions and now only has a couple of months to do it. The company already tried to "steal" a project surrounding its own Côté ground owned by JV partner Sanatana Resources Inc. IAMGOLD management maintained that it needed the property for tailings and infrastructure. They walked away in November, but they would open themselves up to a giant suit from either their shareholders or from Sanatana if they don't buy Sanatana," he says.

Moriarty estimates Sanatana has spent some $9.5M on the project and it would cost IAMGOLD between $50M and $70M to buy the company. Sanatana has about a $4M market cap right now. IAMGOLD could buy it cheap today or wait for gold to go up and pay a lot more money for it down the road. IAMGOLD paid $608M for Côté and admits it has to have the Sanatana ground to make Côté work."

Cook starts his quest for takeover candidates by naming the possible consolidators. "First Mining Finance is busy creating a "mineral bank" by buying companies in the Americas and Canada while prices are low. It has 19 total projects in Mexico, Newfoundland and Nevada," he notes. Possibilities for First Mining or another opportunistic consolidator on Cook's list include Kaminak Gold, Asanko Gold Inc., Nevsun Resources Ltd., Premier Gold Mines and Richmont Mines Inc.

Preston puts Kaminak at the top of her list as well. "This company has done a really impressive job in the last few years derisking the Coffee project. The feasibility study in the first quarter of 2016 could entice a bid." She sees Klondex Mines Ltd. as "one of the better performing miners in the world right now. It is doing a good job at Midas and Fire Creek in Nevada building value. The problem is it would have to have a big buyer, so that may come later in the cycle."

She also sees Sabina Gold & Silver Corp. as a good example of an economic project trading below its peers, making it enticing for possible acquirers. "The challenge is that investors know it is undervalued and they probably don't want to be taken out at this price."

As a region, Preston sees the majors looking at the Yukon again. "Things are cheap there again and the government has put a lot of money into infrastructure and getting First Nations deals signed so that is a prospective area."

Mazumdar's examples include Torex Gold Resources Inc. Asanko Gold (Spec Buy rated by J. Mazumdar), Roxgold Inc. and Pretium Resources (Speculative Buy rated by J. Mazumdar). "Both Torex Gold and Asanko Gold are advancing, permitted, fully funded, high-grade open-pit projects (El Limon–Guajes and Phase 1 Obotan) in manageable jurisdictions (Mexico and Ghana) to commercial production in 2016. Roxgold is advancing a high-grade, underground project (Yaramoko project) in Burkina Faso to commercial production also in 2016.

The Yaramoko project lies in a more challenged jurisdiction (Burkina Faso), but it generates the highest IRR of our coverage universe. Pretium Resources is advancing its high-grade Brucejack underground gold project in northwest British Columbia. Pretium Resources recently closed a US$540M financing package with a couple of private equity groups to fund the project (US$747M, company estimate)," Mazumdar explains.

"With respect to more advanced explorers that are derisking projects through advanced studies, we highlight Dalradian Resources Inc. that operates the Curraghinalt high-grade underground gold project in Northern Ireland. We believe the company is well funded to deliver a feasibility study in H2/16 followed by the submission of the permit application."

Mazumdar sums up the current M&A climate this way, "Potential suitors are seeking quality projects with valuation upside either technically and/or exploration related. Although grade is important, the potential generation of decent EBITDA and free cash flow margins in a stable jurisdiction is more critical."

Marin Katusa, founder of Katusa Research, has also been thinking about possible liquidity events. "Midas Gold Corp. is a fantastic project that I believe a major will eventually want to own. It has a great management team, but it is suffering from two issues in this market: the permitting process—nobody cares about companies in that permitting period—and the cost to build that in this market. A company like Osisko Royalties or Goldcorp will come up and buy that asset," he predicts.

"That asset is a past producer, very high grade and has over 5 million ounces of gold. That's why I've taken a large position. It has the right management team and the right project. It has the right type of geology in the right jurisdiction. That's a contrarian bet on gold. Most people are undervaluing it today, and that's when you want to buy."

Lin's advice is to find a good company and hold on to it. "When the market turns, they can often rise very quickly. I think M&A activity in the gold sector will accelerate."

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