Source: Streetwise Reports 05/10/2018
The first quarter saw some high-profile M&A activity in the precious metals sector. In this interview with Streetwise Reports, Ralph Aldis, portfolio manager of U.S. Global Investors, discusses the market landscape and some companies that could be takeover targets.
The Gold Report: Ralph, there have been some high-profile mergers and acquisitions (M&A) in the mining space in Q1/18. Would you tell us about some of that activity and do you see some trends within it?
Ralph Aldis: U.S. Global Investors funds were beneficiaries of two of the transactions that were takeouts, but we did not have any exposure to the third one.
The most significant one to us is Hecla Mining Co. (HL:NYSE) buying Klondex Mines Ltd. (KDX:TSX; KLDX:NYSE.MKT). Hecla paid a reasonable price. We were up about 6% on that day with that takeout. Klondex had gotten itself in a bind, and Hecla is probably the right operator with the right underground experience to take over and optimize that operation. Hecla has much deeper pockets and a deeper skill bench than Klondex, plus Hecla knows those assets. At one point, it actually owned the Hollister mine, and Hollister got away from it. I think it makes a lot of sense for Hecla to come in and buy out Klondex.
On the same day, Alio Gold Inc. (ALO:TSX; ALO:NYSE.American) announced that it was taking over Rye Patch Gold Corp. (RPM:TSX.V; RPMGD:OTCQX). It took about nine months for Rye Patch to get ramped up from when it initially took over the operations at Florida Canyon. Weather set it back in the first quarter of its start-up, and it just never really hit its full footing. Alio took advantage of the opportunity that we saw there.
Both of those projects are in Nevada, which is on people’s mind in terms of where you want to invest. Many projects that we’re seeing around the world are being hit with higher taxes or are experiencing social issues. People are looking for politically safe jurisdictions. There is a lot of nationalism out there right now, partly starting with the U.S., in terms of some of the policies the government has been espousing. And we’re seeing other countries in the world take that same stand; as opposed to America first, it’s their country first.
The third acquisition that we saw during the last quarter was really a quasi-type acquisition, where Gold Fields Ltd. (GFI:NYSE; GFI:JSE) purchased at the project level Asanko Gold Inc. (AKG:NYSE.MKT; AKG:TSX); it purchased a 50% stake in Asanko’s 90% interest in the Asanko Gold Mine. This is the second time Goldfields has done a purchase at the project level. Previously, it was with Gold Road Resources.
There are several things that come to mind with M&A. One, M&A hasn’t really heated up that much yet. CEOs of many of the major mining companies, or even intermediates, are still looking in the headlights and wondering they’ll lose their jobs if they do an acquisition and it turns out to be a bad acquisition. I think that’s been a real headwind to having M&A at a higher pace.
Then there are the exchange-traded funds (ETFs): the Market Vectors Gold Miners ETF (GDX:NYSE.Arca) and the Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.Arca). From stories I’ve seen on Bloomberg, in one week, half a billion dollars went into the GDX. Half a billion dollars is bigger than many of the actively managed gold funds out there. That means there’s no ability to fund many of the companies out there, and that’s where we’re seeing alternative funders, such as the royalty companies. For instance, Victoria Gold Corp. (VIT:TSX.V) got funded through nonconventional financing from Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) and others; it wasn’t a typical money raise of the past, where equity investors such as myself would contribute to funding that operation.
I think what we’re seeing, and this is the opportunity that many of the gold companies are missing to some extent, is that a lot of the names that aren’t in those two ETFs are orphaned at the moment, and they’re not getting the valuation that some of the companies probably would have. It’s a function of these money flows. There’s a disconnect out there. There are companies that you can buy that are not in the ETF, and if you’re there for the long term, you can probably end up making some money on some of these. But right now, the seniors and juniors, as far as takeovers, they haven’t been very active. We’ve seen them invest in companies but not take them over.
TGR: Some people say that these M&A activities could be a harbinger of a rise in the gold price and lead to more M&A activity. What’s your view of this?
RA: I think that more M&A tends to happen after the rise in the gold price. It seems like people tend to have the fear of missing out. Once they see the gold price rise, I think that M&A activity will probably heat up a little bit more. All the companies will look and say, well, my paper is much more valued now, I can do this transaction. I think we’ll see more M&A as we get further down this road. I don’t know when it’s going to pick up rapidly.
TGR: Are there any companies that you believe could be the next M&A targets?
RA: There are a couple that are fitting the mold of what people have been buying. Klondex and Richmont Mines are being taken out, and are 100,000-ounce (100 Koz) producers. We haven’t seen too much stepdown into the companies that aren’t producing yet.
Wesdome Gold Mines Ltd. (WDO:TSX) is a company—with the drilling intercepts we have been seeing recently and with the restart of Kiena—that fits that bill of potentially becoming a 100 Koz …read more
From:: The Gold Report