So when I bring my critical eyes to their list of prospective takeover stocks, I do the following:
1. I look at the disposition of the stock
2. Look at whether it provides the optimal upside
3. Whether the premise of the author holds, including for all stocks
Now, the problem I have with this list is that 'cash' can actually be a bad thing. What is the point of having $200 million of cash on your balance sheet in a recovering market. Unless this company takes over something soon, its going to be paying too much for assets (to use that cash), or the flipside (if it doesn't), its going to be under-utilising its cash. If they are planning to get into production, I would prefer they use bank money and repay from project revenues, or from an equity raising at a much higher gold & stock price. For this reason, I would argue the following:
1. Focus Minerals is not a takeover takeover target, but more likely an acquirer. True to form, it has actually just acquired Crescent Gold in WA. Now, this does not preclude them from being a target. Of course, if they are an acquirer, then they are 'shifting' the nature of their business very quickly, which can be a source of vulnerability to suitors trying to catch up. I frankly think they would be too messy for a target. But if they are 'acquired', its more likely to be a merger (because of the size of their project interests), and that of course is not a hostile takeover, so no asset premium, no competitive bid...and cash is not required for their projects; but maybe for the partner's projects. Irrespective...its not an optimal exposure. Now, as an acquirer, with governments looking to increase tax, and costs so high in Australia, I'd be looking at Africa or Asia for acquisition. Got any clues? I suspect this company is well-managed because it seems on scant review to achieve targets. Its nice that they were able to raise $225mil from Shandong Gold at 5c, given that their share price is now 1.6c. Kind of weird that a Chinese company would decide to invest in Australian mines.Perhaps for technical expertise....but weird! Glad they don't manage my money. But then there might be some exploration promise in those resources. Its simply too complex company to understand (i.e. waste my time), and analysts will think likewise. Of course you can twist people's arm with a 'mine visit'. We all like to travel. Gets people out of the office. The company only made a net profit after tax of $7mil in the year, so market capitalisation of $147mil looks nominally low given their cash holdings. Clearly the Chinese think they can greatly expand resources. Clearly the market distrusts this company, its complexity, and did not like the dilution from the placement. I frankly think this is a good stock to trade.
2. Gryphon Minerals is a takeover target for a number of reasons. It is a substantial emerging miner, it has a large acreage position in Africa, it offers low-cost ounces, its largely funded for mine development, and its hellishly cheap. If the market was seeing the upside in the gold price, or at least the 'stability' of the gold price, as it consolidates for its next move, they would realise that the present value of their ounces in the ground is about a billion dollars. Not bad for a company capitalised at $90 million with $60mil in cash. This ignores of course there 2nd promising project in Mauritania, the upside from mine expansion, further exploration upside and the prospect of higher grade ounces being mined earlier to bring cashflows forward (i.e. Better net present value).
3. Perseus Mining (PRU.ASX) is another good company. I was a shareholder in this company a long time ago. This company is similar to GRY in terms of geological setting. It is more likely to attract the interests of major companies. Its project is appealing, so it will not have trouble raising cash, with some $63mil in cash (and bullion) like GRY. It similarly has a large acreage in Africa. The difference is the PRU is a 'miner' producing 250,000oz per annum. The project cash costs are quite high for the quarter at $US1100/oz. This gives a lot of leverage to higher gold prices, however since I don't see substantially higher prices for some time, I'd prefer an emerging gold producer like GRY, which will better time its development schedule to benefit from a gold price rally. The company has hedging in place, however its a small commitment, and I don't see it having any significant impact on earnings since it will be erased in the next few years. The big difference compared to GRY is the low average grade of the ore, i.e. 1.5g/t compared to 2.2g/t for GRY if I'm not mistaken. This however might be improved by further exploration.
4. Ramelius Resources (RMS.ASX) is a miner with a spread of interests in Australia. The company is capitalised at $135mil, it has $54mil in cash, however it suffers from the same problem as 'Focus' - a lack of focus.
5. Saracen Minerals (SAR.ASX) is a less appealing miner because of its focus on WA, the secondary pickings of its resource base. I would have some challenge trying to assess the commercial viability of the 19 deposits that make up its 4.1Moz. I do however note that its hedge position will prove 'unattractive' for investors looking for upside, but at the same time, it will prove financially lucrative because whilst gold can be expected to make rallies, technically, I expect it to go sideways for the next few years. The other problem is that, with just $13mil in cash and $22mil in debt, its facing UG development costs and capital costs. I'd prefer a simply proposition of 'all easily accessible' open cuttable ore, which is why I would give primacy to stocks like Gryphon. The final problem is the spectre of ore coming from far-afield to a centralised plant. You then have to wonder about the commercial viability of this ore. I think you could come away from a field trip without even knowing given there are 19 deposits. Analysts like simply propositions. There are good reasons for this - they will otherwise be buried in detail, but also its not very efficient use of time. Such stocks, as noted however, have value, but in the midst of a gold market recovery, you have to wonder if this is your front-line stock. I'm inclined to say no. Clearly the company is aware of the 'complexity' by arguing in their presentation that "although only the two key medium term projects of Whirling Dervish and Red October will be discussed in this presentation as they make up the bulk of the gold production for the next 3 years". The positive news of course is that they are actually producing. The latter considerations mean that Saracen is unlikely an acquirer or takeover. It will have its hands full with its consolidated interests in Western Australia. **
6. Resolute Mining (RSG.ASX) has a spread of Australian and African interests; so it can be considered a 'mature' example of what GRY and PRU can become. In fact, GRY and PRU are possible merger partners, or takeover targets for Resolute Mining. They are a low-cost miner, they again have a track record of acquiring mines (Noble Resources). They are good stocks, as 'acquirers', but also a reasonable target.
7. Silver Lake Resources (SLR.ASX) has gold interests in Australia. The share price of the company has collapsed in recent times from over $3 to just $0.95. The company is a consolidator of depleted mine assets; hoping to unlock value, as well as acquiring other underloved assets. I'm not going to waste my time trying to understand its plethora of interests. You might get excited about its cash in bank, but what if it was all committed to 'flogging a dead horse'. Apparent resources might well turn out not to be mineable. This is where I prefer virgin, single-operations. It is apparent that they are having to go underground to develop resources. That's another negative as you will need to appraise the amount of development needed.
What I think is an interest fact is the Resolute's Golden Pride mine is due to close this year in Tanzania. I would think there is some appeal in attempting to find an explorer in the vicinity of this mine which might offer resources to toll treat through this plant, or which Resolute can otherwise takeover. Let me know when you find that gem.
So in conclusion, we would consider Gryphon Resources to be the stand-out target for a takeover, by Resolute or a Canadian company, but possibly just a farm-in by a Chinese company with money to throw around. There is also the prospect of another pan-African resource house being formed from PRU, GRY and/or RSG. PRU is also a target, but perhaps not for the next 2 years, as gold prices consolidate (i.e. range trade). There will be good rallies in this stock to trade though because of its thin margins (i.e. low grades).
My apologies for not looking further afield for prospective 'targets'. I personally want to research more emerging miners. By all means email me if you have any ideas.** Prior to this edit, I implied that Saracen had interests in Indonesia. This has since been corrected. I was distracted from researching this particular company.
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