Tag Archives: take-over target

Gold Canyon: In scarcity – Large gold projects in Canada up for grabs

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
www.geckoresearch.com

 

If you like our work, feel free to share this link with your friends for our free newsletter: www.geckoresearch.com/signup

We are not investment advisors and what we write is our own view only. Please read our disclaimer

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Why Gold Canyon is a keeper and should be held on to

Gecko Research, Apr 18, 2015

The following was part of our ‘Weekly Update’ newsletter that we sent to subscribers today.

———————————————————————————————————–

On April 10th we posted a short piece containing some technical analysis on GCU (Is Gold Canyon getting ready for a breakout?). Although technical analysis is useful to us, it’s not 100% reliable. This time it was though and we have just seen GCU breaking out on good volume. The stock gained 11% on Friday alone with more than 700,000 shares traded. Readers who bought on our Feb 25th investment idea are now enjoying a 47% gain.

GCU_Apr17_2015
Under normal circumstances we would be taking profits and start to trade a stock like GCU, but we won’t. Here are some reasons why:

1) M&A activity is strong and if we see other juniors taken out, that will increase the interest for GCU even more
2) Rumors of a possible take-over are still intense (consider that Gold Canyon’s Springpole deposit is one of the largest undeveloped gold resources in Canada in the hands of a junior)
3) We find the stock greatly undervalued
4) GCU can be thinly traded from time to time and to get back in could turn out to be a difficult task
5) The chart looks like a dream from a technical perspective

Golden_Cross_in_GCU_coming
The chart above is self-explanatory but we’ll say a few words for those that are not so familiar looking at charts. A (positive) Golden Cross is when a shorter term moving average (MA50) is crossing the longer term moving average (MA200) to the upside. As you can see in the chart above, that is about to happen soon and is considered to be a very bullish sign as it confirms a new trend. There is a saying, “Let the trend be your friend”, and we feel this is very true for Gold Canyon. We can see that the stock has created an almost perfect V-shaped bottom and with a new up-trend being confirmed soon, we are holding on to our shares.

Even if “Golden crosses” aren’t 100% predictable to determine future price moves, it’s loved by many and seen as very bullish. The same is true for the “negative” golden cross as we point out in red which happened around Oct 1st, 2014.

(Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time.)

 

Previous articles on Gold Canyon:
* 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
www.geckoresearch.com

If you like our work, feel free to share this link with your friends for our free newsletter: www.geckoresearch.com/signup

We are not investment advisors and what we write is our own view only. Please read our disclaimer

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BLOG: Is Gold Canyon getting ready for a breakout?

Gecko Research, April 10, 2015

Normally, a flag formation is a short term chart pattern which in our experience have been proved to be quite reliable. After a leg up, which we had, the stock trades in a sideways pattern (the flag) until the price moves above the upper trendline, which is when the trend continues up.

Making a technical analysis on a small and thinly traded stock like GCU is always more risky and less predictable, but nevertheless, it will be interesting to observe the near-term in GCU.

gcu_apr10_2015

 

Gold Canyon – Just how cheap is it?

Gecko Research, Apr 7, 2015

The Importance of a Good Management

Since the bear market for gold started in 2011, we have seen valuations in the gold companies come down significantly. Not only that, we have also witnessed a lot of value completely vanish in the companies themselves, and in many cases, never to return again. The way we see it, the cause of the destruction of value within the companies, is due to two major reasons besides the obvious, the price of gold. The first one is the poor quality of management. The second reason is that the companies’ flagship property never had enough quality to make it in the first place.

Is it really that simple? Of course we are simplifying a bit, but this is the way we see things. We are also of the opinion that just as a bad management can destroy a decent or even good project, a great management can make a so-so property work enough to eventually become a mine.

It makes sense to remind ourselves of what a venture company is supposed to do. They are supposed to be ventures, where a team develops a project using its competencies and then passes on the baton to someone else who has different set of competencies to keep moving it forward. A generative company is not necessarily good at exploring and exploration is a totally different business than being a miner. Therefore, projects might change hands many times before getting into production.

Managements, being human beings, are afraid of losing their jobs. They stay on despite having outlived their use since they are comfortable with a regular salary and life-style. What we do know is that the management of Gold Canyon is not like this, we have found that they really work in the shareholders’ best interest. They will move on when the time comes and handover the project to those who can take it further. We think that time has come.

As a reminder to our readers, management of Gold Canyon has no management contracts with change of control payouts (aka golden parachute payments), a rarity in a business where this is how it should be.

Some Reflections on the Price of GCU

* At the peak almost to the day four years ago, GCU hit its all-time-high around $4.25
* End of July 2014, (~8 months ago) GCU hit 42 cents
* December 9th, 2014, GCU made a low at 9 cents
* Six weeks ago on Feb 26th, we added GCU to our portfolio at 17 cents

When we are writing this article, the price of Gold Canyon is C$0.21 which gives the company a market capitalization of $33 Million. How can one determine if that is cheap or perhaps even expensive? In all honesty, to compare to the >4 dollar share price in 2011 does not make much sense today, but we feel the same when comparing to the low set in December as well and we see a lot of upside in Gold Canyon. Let us point to why.

Making Our Point – How Deficits and Book Value Can Add a Lot of Value

Most investors use a company’s book value and deficit at the end of their analysis work, to assess tax liabilities. Mostly, this is how it should be. Book value and deficit mostly make no sense if a project is uneconomical or is too far from production. But there is an interesting twist that must be considered.

Book value and deficit have values by themselves, independent of the projects. For example, assume what would happen if a profit-making company acquires another company with $100 million in deficit and book value combined and no project of value. If the corporate tax is 35%, such an acquiring company would save $35 million in its tax liabilities. So, it makes sense to look at the balance sheet of companies to see if they have value from a mere tax perspective.

Gold Canyon (GCU) has $74 million of asset value, most of which comes from their Canadian project, Springpole. They also have an accumulated deficit of $42 million. While not all of this deficit can be used for tax purposes, given complex tax regulations, and some might have expired, to us it is clear that between $74 million and $116 million is available to be written off for tax purposes for an acquiring company. As we wrote earlier, our thesis to own Gold Canyon in the first place is for GCU being an obvious take-over target.

At the current share price of $0.21, Gold Canyon’s market capitalization is $33 Million. In our opinion, and in a very interesting way, just the balance sheet of Gold Canyon is worth close to its current market capitalization for a profit-making acquiring company. Of course, as we wrote earlier, Springpole is one of the better and rare big Canadian gold projects available.

A Fair Value

Although, GCU has gone up quite a bit since our first recommendation (when the share price was $0.17), given tax benefits Gold Canyon’s balance sheet offers to an acquiring company, you might still be getting the project for almost no value. We cannot stress enough how strongly we feel that someone should take Gold Canyon out, someone with good mining skills to put Springpole into production. No one can dispute the fact that the current management of Gold Canyon has put the company on a silver platter for the right mining company to take the Springpole project to production.

How much are GCU shares worth then? Well, the numbers we are working on internally is no use to publish here, we would be called fools for sure, that is how high our valuation is on GCU. We recognize that the market is what it is right now, but we do not see why the Springpole project would not be worth ~$200 Million to an acquiring company. Add another $30-40 Million or so in built up deficit and book value combined and a fair price for GCU would arrive at ~$1.25/share. We are not naïve enough to think that will happen in today’s environment but anything less than half of that would seriously disappoint us. And remember, if Gold Canyon would get a “Probe-Mines-valuation” (Goldcorp to buy Probe Mines for $526 million) a bid could be reaching our internal numbers.
That answers our initial question pretty well we think, “Gold Canyon – Just how cheap is it?”.

Previous articles on Gold Canyon:
* 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
www.geckoresearch.com

If you like our work, feel free to share this link with your friends for our free newsletter: www.geckoresearch.com/signup

We are not investment advisors and what we write is our own view only. Please read our disclaimer

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Small Mining Companies Hibernate to Survive Industry Slump

Dow Jones Business News,  March 13, 2015

Gold Canyon Resources Inc. has 5.1 million ounces of gold and 26 million ounces of silver underground on property in Northern Ontario. It owns little else.

The Toronto-listed company is part of a generation of junior mining companies that has gone into hibernation. Rocked by a three-year-old mining downturn, these companies have reduced themselves to skeleton staff, locking up their properties and stripping out almost all costs.

Junior miners, which are companies that specialize in exploration or small-scale mining, are in a position to sit out a slump because they often have little debt, few big costs and the ability to hire out their machinery, such as drills. That is unlike the industry giants, from Freeport-McMoRan Inc. to Rio Tinto PLC, which have big debt piles and large, high-cost operations to maintain.

Those qualities have allowed the junior mining sector to defy predictions of widespread bankruptcies. Nonetheless, the downturn has stalled their exploration, historically a major contributor to new supply of metals, from gold to copper.

An industrywide pullback in exploring for nonferrous metals reflects in part the juniors’ dormancy. Globally, the sector’s exploration budget shrank to $11.4 billion in 2014, roughly halve of the $21.5 billion earmarked in 2012, according to a report by SNL Metals & Mining.

Gold Canyon, which was founded in 1985, had just completed its exploratory drilling when the downturn hit full stride in 2012, sending share prices tumbling and steering investors and banks away from many new mining projects. The next step for Gold Canyon was to be a study to determine how economical it would be dig out the gold and silver–but that was put on hold. Such feasibility studies can cost up to $15 million.

“We have cut to the core,” said Ron Schmitz, a director at Gold Canyon with more than 20 years of industry experience.

Gold Canyon, which had built a 60-plus person camp in northwest Ontario, now has just a “couple of guys” there to keep any intruders out, said Mr. Schmitz. The company recently raised money and has no debt, allowing it to ride out the downturn. But it still has costs.

“It’s about $150,000 a year just to exist,” Mr. Schmitz said.

Earlier this month in Toronto, Mr. Schmitz joined over 23,000 others in the mining industry, largely from the junior sector, for the annual Prospectors & Developers Association of Canada conference. Most were looking to raise money to restart their projects. Most would return home disappointed.

“There is no money walking the floor,” said Richard Cushing, who works in investor relations at Monument Mining Ltd, a Canadian gold miner.

Because mines typically take years to develop, skimping on exploration could translate into meager supply growth down the road. But if in the meantime demand picks up in a notoriously cyclical industry, miners may find themselves scrambling to boost production.

Among PDAC attendees, Everton Resources Inc. also is trying to hold out by shrinking operations and putting exploration on hold in the Dominican Republic. In 2012, the gold miner had up to 20 staff and hired teams of contractors to drill, explore and test samples. Now it has around eight employees and is doing little in the way of digging out its gold or exploring for new assets.

“We sit and wait till the markets allow us to raise money,” said Sabino Di Paola, the company’s finance chief.

Since its peak in April 2011, the Global X Junior Miners ETF index has fallen about 78%. From their price peak, gold is down 38%, copper off about 42% and iron ore down 70%, according to the Steel Index.

At the end of January, Toronto-based exchange TMX Group was home to 1,485 miners, of which 80% were listed on the TSX Venture junior exchange. All of these miners combined had a market capitalization of $266 billion, less than half of their peak value reached in February 2011.

Of miners’ total market capitalization on the TMX in 2015, only 3.7% represented companies listed on the junior exchange, underscoring how badly these miners have been hit.

For some, even a junior exchange listing–which for Gold Canyon runs about $35,000 a year–has become a luxury. Last year, 44 miners asked the TMX Group to delist them from Canada’s various exchanges. That was double 2013’s number and well over the 10 miners asking out in 2010 when the mining boom was in full stride.

Delisting can be a risk for investors, who already are holding portfolios of hibernating and illiquid miners, as it wipes out the remaining equity value of the holding.

For some ill-fated miners, their listing is all they have left.

Peter Cunningham is the founder of Lions Edge Capital, a Toronto-based corporate advisory firm that specializes in enlisting miners in so-called reverse takeovers. Last summer, Lions Edge brokered a deal in which tech company Smart Fleet bought Golden Virtue Resources Inc, a lithium exploration company, and reversed into its TSX Venture Exchange Listing.

Reverse takeovers have seen miners supplanted by tech companies, retailers and potential suppliers of medical marijuana, as companies in these sectors look for a cheaper way to get a listing.

“You have a public company that cost $200,000 a year to keep listed, with no money, drowning in debt, so it is easy to have a conversation” said Mr. Cunningham, who attended the PDAC conference this month.

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