Regarding M&A in the PM Sector – This Comment From Excelsior Should Be Read
I really appreciate all the comments (which have been very civil and informative recently – at least on the market segments) and I always take time to read over as many as I can. Unfortunately I have been far too busy to respond but please know that I am still reading over them and learning a lot from all of you.
This comment last night from Excelsior I wanted to highlight. It was posted on my interview with Dave Erfle and addresses M&A in the metals space.
Thanks for the well thought out comment Ex!
Cory & David E. – Interesting discussion the topic of mergers but I’m looking at things much differently than you guys are, and see the influx of mergers as a very positive thing for the mining sector for a few key reasons.
1) As you mentioned we’ve needed to see a Consolidation in the space and many of these mergers (even at market with no premiums) are doing just that.
So whether it was the Major consolidations we saw last year like Newmont/Goldcorp, or Barrick/Randgold, or Pan American Silver/ Tahoe resources, or these Mid-Tier Producer mergers like Equinox / Leagold or SSR Mining / Alacer they are reducing the sheer number of companies to form larger ones. That is a huge plus for the space, and focuses investor money on a smaller audience of players in the production space.
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2) We discussed mergers and acquisitions on this blog so many times, and we’ve pointed out over and over again that this is misplaced notion and fantasy that the “Majors” are going to take over “Jr Explorers” and pointed out that almost never happens.
> One of the only examples I can think of is when Kaminak was taken over and that was an anomaly, where the big boy overpaid for a deposit with many unknowns, and it wasn’t the smartest transaction.
>> If the Majors taking over Jr Explorers was so common then we should be able to list off dozens of these transactions from each year. Here is the rub… that simply doesn’t usually happen, so you guys are going to need to adjust your expectations there. You guys are looking for the takeovers in the wrong areas if you think most explorers are the primary targets of the big boys.
>> In contrast, every year there are over a dozen Take-Overs of distressed Producers, Single-asset Producers, or unloved and forgotten Developers. That is the M&A sweet spot, and the companies to target to get in front of M&A activity if you want to be on the receiving end.
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3) Lets start with the Producer takeovers:
> Look at what we just saw with the recent announcement the takeovers of distressed producers like SEMAFO, Alio Gold, TMAC, and Guyana Goldfields, or bolt-on single-asset producers like the takeover over Detour Gold by Kirkland Lake. Everyone knew SEMAFO, Alio Gold, TMAC, and Guyana Goldfields were struggling, and everyone knew Detour was a cash cow that would eventually get taken over by a Major.
—-> That’s the recipe you are looking for!!
>> Think back to the takeovers that stick out from the last few years (beside the Mega Mergers of Majors) and they are NOT Majors taking over Explorers. They are either really advanced Developers near production, or more often bolt-on producers for the Mid-tiers that acquire them: Newmarket Gold, Claude Resources, Lakeshore Gold, True Gold Richmont, Klondex, Detour, Metanor, Marlin Gold, Avnel Gold, Avesoro Resources, Rye Patch Gold, Primero, etc…
>>> We had discussed all of those older takeovers BEFORE they actually happened and I was in all of those just prior to takeovers, (except Claude, because I had sold out too soon before they got grabbed). The reason why is because they were so obvious as targets.
In the late summer of 2017 someone asked who we felt the next takeover targets would be and I said (RIC) Richmont and (KDX) Klondex would be next. I got immediately chastised by 2-3 prominent posters there saying they were both struggling and garbage and why would anyone want those dogs. Well (AGI) Alamos Gold acquired (RIC) Richmont 2 months later [and Monarch got some of RIC’s properties as well], and (HL) Hecla acquired (KDX) Klondex n March 2018.
—> I reposted that thread for those posters to see it all grouped together once the news broke, and it was crickets from them….. Those takeovers were hiding in plain sight and almost everyone was too conditioned to look for only the “best of the best”, and simply could not imagine that it was really the “Best of the Worst” that the larger producers wanted.
> Another example:
In 2017 over at ceo.ca e were naming who we felt the next West African takeover would be and I threw out (AVK) Avnel Gold, and most posters nearly threw up at the suggestion. When Endeavour Mining announced they were taking out Avnel Gold, many posters there wrote me in private messages — stunned that they were grabbed before so many others. I responded back that the big boys like good deals too, and can take a good asset and operate it much better than Jr developer or producer can.
>> So to recap: Either there are:
(A) quality assets in a distressed company that a big boy feels they can run better or
(B) there is a company just finishing up a turnaround, and when the big boys sense they are ready to finally make money then they pounce. (like what just happened to Alio)
Those are the kinds of companies investors should be searching for if they want takeover premiums, and not the hottest cult stocks of the moment.
>>>> Here are a few distressed producers or high quality Single-asset Producers just begging to be taken over right now to augment a larger producers production profile:
(AKG) Galiano [formerly Asanko], (HRT) Harte Gold, (NEE) Northern Vertex, (HUM.L) Hummingbird Resources, (ROXG) Roxgold, (ANX) Anaconda Mining, (SAM) Starcore International, (SGI) Superior Gold, (TRY.AX) Troy Resources, (NGD) New Gold, (MML.AX) Medusa Mining, (MND) Mandalay Resources, (TXG) Torex Gold, and (WGX.AX) Westgold.
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4) The other group that is primer for takeovers are the advanced Developers with known deposits, clear economic studies done at lower Gold prices, that are even more economic today. This is why Gran Columbia is taking over Gold X Mining right now.
In the past years there have been regular takeovers of attractive Developers like Reservoir Minerals, Dalradian, Continental Gold, Gryphon Minerals, NewCastle Gold or unloved and forgotten developers, Barkerville Gold, Golden Reign, Savary Gold, Beaufield, Merrex Gold, Kiska Metals, Anfield Gold, Pershing Gold, etc…
… or how about the failed attempts at taking over Dolly Varden, or Maritime Resources?
>>> There are about 100 Advanced developers that seem likely to be takeover candidates in the Gold space, because at one point they will be developed into mines.
A few that come to mind are Marathon, Minera Alamos, Sabina Gold & Silver, Orezone, Osisko Mining, Treasury Metals, Triumph Gold, West Kirkland, Probe Metals, Orca Gold, Bonterra, Novagold, Seabridge, Bluestone Resources, Gold Standard Ventures, Falco Resources, Midas Gold, Corvus gold, Maritime Resources, etc…. There are a lot of them, but they have been derisked, will get revalued higher as metals prices rise, and have the takeover aspect as a kicker and liquidation event to exit one’s position into.
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5) There are investors that are in the companies doing the acquiring, and investors in the companies getting acquired, and there are positives and negatives for both groups in any acquisition.
> To only look at it through the lens of wanting to get a great premium in the company being taken over, and getting disappointing if they are just 40-60% premiums at the share prices lows is kind of a “glass half empty” approach. Yes, everyone loves a good takeover of a company moving steadily higher, because the M&A deal is the icing on the cake, but sadly that is now how most producers buy. Most want a deal and want to pick off good assets when there is blood in the streets, just like investors do. As a result, many takeovers come when the company being acquired is swirling the drain.
>> With many of these distressed companies, there are investors that get in right before the merger, for just the very reason of getting positioned before the big boys go shopping. One of the sub-sectors I look for is the “Best of the Worst” where there is a quality asset that is a dog and I buy when there is blood in the street and over and over have had nice scores doing this, or have caught a few turnaround stories if they dig themselves out of the hole.
I got in when things looked bleakest for Richmont, Klondex, New Market Gold (via the predecessor Crocodile Gold), Metanor, Lake Shore Gold, Corex, Avnel Gold, etc… so when the premium came, it was a nice score. I actually had just gotten in TMAC for the same reasons about a month before this merger, but jumped back out because I felt they may have a dillutive financing or go bankrupt, but it was the right idea.
No, long suffering shareholders don’t get rewarded in those transactions, unless they averaged down, but they were the same people that held a loser for years so that is on them. The takeover premiums don’t go to folks like that, but to the bottom fishers.
Example: If someone held onto Guyana Goldfields from $8 down to $.80 then I have little sympathy for them that the takeover premium didn’t make them whole.
Instead of looking for the bloated and often overpriced best of the best, more investors should be researching companies with flaws that are wounded, that other larger producers believe they can take over and do a fixer upper. Those are the ones to bottom fish, and that is not without risk, but the odds are much higher a bigger fish will eat them.
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>>> Lastly, there are investors in the larger companies, that are doing the acquisitions, that are thrilled to see their companies doing a great deal and reel in a win. I’ve often celebrated when a good management team picks off the weak and wounded for pennies on the dollar as it really solidifies that new larger company. When Equinox picked off the mine from New Gold on the cheap that was a great deal for them, but not for New Gold. That is the nature of a buyer’s market and no different than real estate or collectibles, or any other asset class that someone gets a great deal on.
> Example: That is how I felt up until this week about (SVM) Silvercorp making the initial offer to nab (GUY) Guyana Goldfields on the cheap. I was happy they were getting such a steal, but it appears they have now been outbid by Gran Colombia. Still there is the excitement of knowing you just got a deal, that was overlooked in your comments today.*
>> Another Example: When Primero (P) was being raided, at the time I was pissed in how it was going for them, but I also owned McEwen Mining (MUX) that scooped up Black Fox, Argonaut (AR) that gobbled up Cerro del Gallo, and First Majestic (AG) that got San Dimas. All 3 of those producers MUX, AR, and AG won big by being the acquirer and I was proud of those management teams for picking up good assets at a good price. *
>>> One more example: I was freaking thrilled when (USAS) Americas Gold & Silver picked up Pershing Gold for a song and a dance, and nobody challenged them. That was a huge score, as they are now showing, and at the time people belly-ached that it wasn’t a good deal for long-suffering Pershing shareholders. Who gives a flip about investors that sat in a sinking ship for years. I was thrilled to be on the side grabbing the good asset, because I believe in the team at USAS and knew they’d get it developed and into production and they have. *
*** That is the great side of these acquisitions that are being missed if you only look at the takeover premiums for companies getting poached. The other side of the equation is all the gains the acquiring companies are getting by doing the acquisition.