Gecko Research, May 15, 2015
M&A is hot and quality projects are scarce. If you are looking for a large gold project in Canada, not already in the hands of a major, your choices are very limited.
M&A activity stronger than ever
In the past we have written a fair bit on mergers and acquisitions in the mining space. Good companies are being acquired, as their share prices have fallen along with the prices of the bad ones in the last few years. It has become very difficult for these small companies to raise funds.
There is an ongoing quest for gold juniors in safe jurisdictions and we are seeing new acquisitions on a weekly basis. We have seen majors being very active in the past year (AEM/YRI bought Osisko, Goldcorp bought Probe Mines) with Agnico Eagle being perhaps the most active major out there. Agnico has also made strategic investments in juniors through private placements which has also been the strategy for our old top pick OceanaGold as they just took a 15% stake in Gold Standard this week.
Lately we have also seen juniors consolidating their assets, making the combination a stronger vehicle going forward, sort of a 1 + 1 = 3 if you will. NovaCopper merging with Sunward Resources is a great example how one company with a management and a project secures its financing by way of merger (NCQ bought SWD at >100% premium).
Our interest is to take positions in companies that are deeply undervalued and have attractive assets and undervaluation enables an acquirer a possibility to offer a premium. For example, Coastal Gold (COD) was trading at $0.015 about a month back. An announcement of a friendly acquisition by Sulliden Mining (SMC) resulted in a bidding war. It is now being acquired by First Mining (FF) for equivalent of $0.06. About 200% on what was invested a month back will been made, tripling your money. Of course, we did not see the acquisition of COD coming.
It’s obvious, isn’t it?
So, let’s have a quick look at why we think Gold Canyon is an obvious take-over target. All these are large, rare projects, and hence attractive to major and mid-sized mining companies. Their share prices, market capitalizations, and global gold resources are in parenthesis:
- Gold Canyon ($0.25; $40 million; 5.1 million oz)
- Pretium Resources ($7.40; $1,065 million; 7.5 million oz)
- Detour Gold ($13.66; $2,335 million; 15 million oz)
- Rubicon Minerals ($1.32; $520 million; 3.3 million oz)
- Romarco Minerals ($0.45; $559 million; 4.8 million oz)
Now, the above are not really comparable numbers. In the first two companies capital has not yet been invested. The latter three are either fully financed for production, close to production or have recently started production. Moreover, grade and economics of these projects are different. Some of them even have liabilities on their balance sheets.
What we want to emphasise from our numbers is how difficult it will be for a major mining company (which are mostly struggling financially) to offer much of a premium to, say, Detour or Pretium, given their very high valuation. As a result, we just don’t see the kind of money made in the acquisition of COD by FF to be made in the latter three companies.
Gold Canyon has all the ingredients to attract
For the reasons described above, we have focused on Gold Canyon as they are holding a very large and attractive project, but is available to be picked up at a small fraction of valuation of other companies. That is why they offer a possibility of a high upside. Moreover, given that they are not yet in production, it is easier for an acquiring company to put them in hibernation, if gold price does not recover. You cannot do this easily with a project on which capital has been invested.
The junior sector is so risky that we either want to make a home-run (invest for a big upside) or go home (just stay in cash). We have in the past repeatedly mentioned that Gold Canyon’s Springpole project is one of the rare, large gold projects in Canada. Add to that it also has good economics even in today’s gold price environment which is very unusual. We also know that the rumor mill among institutional investors in Toronto is hot about what might be next for Gold Canyon. It has been brought to our attention that some funds have acquired meaningful positions.
The rumors surrounding GCU is all good for us, but it’s not the only reason for our investment. Gold Canyon is holding a large land package which is virtually very much unexplored (see earlier articles, links below) and the current 43-101 resource is based on a very small part of the overall project. With more than 5 Moz in resources, the potential huge upside is what attracts us the most and we feel this also protects our downside.
What the Springpole project need is for someone to take this project forward. Current management has done a tremendous job up until now and created a lot of value in the company. All that value in our view is not reflected in today’s share price, which is the reason why we haven’t sold a single share.
The point we are making is that the M&A activity is at full speed and we expect this to continue throughout 2015. Deals almost always include a junior company on one side and interestingly enough, both juniors and majors are on the hunt for new acquisitions on the other side as seen in the examples above.
Although there are several very low-grade projects available in Canada, many of them are not really economical projects and will never become mines. That is why Gold Canyon’s high grade open pit Springpole project stands out from the rest and should be on everybody’s radar (including companies looking at acquisitions).
Previous articles on Gold Canyon:
* Gold Canyon – What We Are Looking For As Investors
(http://blog.geckoresearch.com/content/8569, Apr 22, 2015)
* Why Gold Canyon is a keeper and should be held on to
(http://blog.geckoresearch.com/content/8510, Apr 18, 2015)
* Gold Canyon – Just How Cheap Is It?
(http://blog.geckoresearch.com/content/8364, Apr 7, 2015)
* Gold Canyon is Heating up – Institutional Buying is Evident
(http://blog.geckoresearch.com/content/7964, March 6, 2015)
* Ripe for a Take-over – Gold Canyon Resources
(http://blog.geckoresearch.com/content/7814, February 26, 2015)
Team Gecko Research
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