Amid gold price whipsaw, M&A heats up in the mining space

Amid gold price whipsaw, M&A heats up in the mining space

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News of a vaccine with a 90% success rate caused stocks to soar on Monday with the Dow and S&P 500 setting new records, while gold whipsawed $118 lower intraday. The largest single day gold move lower in over seven years nullified its breakout from a 3-month descending wedge last Friday, and since then has created a bearish flagging pattern on the daily chart.

With gold futures closing below $1865 on the Comex this week, the sharp selloff below this support level brings back the possibility of the $1750-$1800 region being tested before the correction of over-sized gains in the safe-haven metal finds a significant bottom. Gold futures basis $1800 has technically become a critical support level, being an area where we have seen plenty of resistance going back to the 2008 gold bull. 

Meanwhile, M&A began to heat up in the sector last week, as Yamana Gold Inc. (AUY) and Monarch Gold Corp. (MQR.TO) announced that they had entered into a definitive agreement in which Yamana will purchase all of Monarch’s shares that it does not already own for C$152 million.

Under the agreement, Monarch will first spin out some of its assets and liabilities into a new company, and Yamana will acquire the remaining properties, including the Wasamac gold project in Quebec’s Abitibi region and the Camflo property near Val-d’Or, Quebec. The takeover is expected to be completed by January 2021.

According to the Monarch Gold press release announcing this proposed deal, boards of both companies and certain larger shareholders of Monarch have entered into support agreements. The agreed parties together, along with shares already owned or held by Yamana, equal approximately 28% of Monarch’s issued and outstanding stock.

But the acquisition will need regulatory, court and stock exchange approvals, along with a two-thirds majority approval by Monarch stakeholders and other closing conditions. 

This proposed offer by Yamana equals just $40 an ounce for the 2.88 million-ounce Wasamac gold resource. The industry average is twice that at $80 per ounce when comparing similar past acquisition deals in the gold space.

Yamana rival Alamos Gold (AGI), who also has operations near the Wasamac Gold Project, controls 16% of Monarch stock. Both Hecla Mining (HL) and Agnico Eagle Mines (AEM) also hold positions of 4% and 3%, respectively.

Being a Monarch Gold shareholder, I am hoping for a bidding war to take place for this quality asset that is being offered at a significant discount to previous sector deals, while located in a Tier 1 jurisdiction.

In mid-July 2020, Russian miner Nord Gold S.E. made a take-over offer of A$0.66 per share for Australian developer Cardinal Resources (CDV.TO), which operates in a Tier 2 jurisdiction. Chinese miner Shondong Gold, who had purchased Cardinal shares a week prior to Nord Gold’s offer, began a bidding war shortly thereafter and made a A$1.00 offer last week for the junior.

Earlier this week, there was another acquisition deal announced. Canadian developer Cross River Ventures (CRVC.CSE) entered into a definitive share purchase agreement with privately-held mineral exploration firm Northern Dominion Metals (NDMC) to acquire all of the outstanding share capital of NDMC.

Then, in response to a Bloomberg press report, Endeavour Mining (EDV.TO) confirmed in a statement on Tuesday that it is “in discussions” with Teranga Gold Corp (TGZ.TO) regarding a “potential merger of equals style combination”.

It added, “These discussions may or may not result in an agreement in respect of a potential transaction and any transaction would only be pursued if the board of Endeavour believed that it represented a compelling value creation opportunity for its shareholders”.

Also, Quebec explorer Bonterra Resources (BTR.V) received a nonbinding letter of intent from a large third party regarding an all-share acquisition of the company at about C$1.60 a share based on prices on November 6th. The company said on Tuesday that the offer was opportunistic, unsolicited and that it had since expired.

Meanwhile, underground gold reserves held by major mining firms continue to be low and falling. New reserves are becoming increasingly harder to find with resources being used up, and exploration is costly. Major mining companies have a few ways to remedy their shortages. They must either discover new underground resources through exploration, or acquire them via the takeover of junior development companies.

It is now cheaper for companies to buy developing or developed projects on Bay Street via acquisition, rather than to develop projects themselves given shortages of capable development teams and timeline pressures while the gold price consolidating.

As the healthy consolidation of recent out-sized gains in the gold space continues, this is a great time to consider accumulating a basket of junior developers controlling large projects being de-risked into the finance stage. With the gold price likely in the process of creating a new floor in the $1800 region, global producers are beginning to concentrate on replacing depleting reserves.

As senior gold producers face declining production profiles, shrinking reserves, and a return to rising production costs, I expect more news of miners targeting acquisitions to supplement their depleted pipelines going into 2021.

If you require assistance in choosing which quality take-over candidates in the junior space to invest and would like to receive my research, newsletter, portfolio, and trade alerts.

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