Insights From Listeners – Wed 13 May, 2020

Regarding M&A in the PM Sector – This Comment From Excelsior Should Be Read

I really appreciate all the comments (which have been very civil and informative recently – at least on the market segments) and I always take time to read over as many as I can. Unfortunately I have been far too busy to respond but please know that I am still reading over them and learning a lot from all of you.

This comment last night from Excelsior I wanted to highlight. It was posted on my interview with Dave Erfle and addresses M&A in the metals space.

Thanks for the well thought out comment Ex!

Cory & David E. – Interesting discussion the topic of mergers but I’m looking at things much differently than you guys are, and see the influx of mergers as a very positive thing for the mining sector for a few key reasons.
1) As you mentioned we’ve needed to see a Consolidation in the space and many of these mergers (even at market with no premiums) are doing just that.
So whether it was the Major consolidations we saw last year like Newmont/Goldcorp, or Barrick/Randgold, or Pan American Silver/ Tahoe resources, or these Mid-Tier Producer mergers like Equinox / Leagold or SSR Mining / Alacer they are reducing the sheer number of companies to form larger ones. That is a huge plus for the space, and focuses investor money on a smaller audience of players in the production space.
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2) We discussed mergers and acquisitions on this blog so many times, and we’ve pointed out over and over again that this is misplaced notion and fantasy that the “Majors” are going to take over “Jr Explorers” and pointed out that almost never happens.
> One of the only examples I can think of is when Kaminak was taken over and that was an anomaly, where the big boy overpaid for a deposit with many unknowns, and it wasn’t the smartest transaction.
>> If the Majors taking over Jr Explorers was so common then we should be able to list off dozens of these transactions from each year. Here is the rub… that simply doesn’t usually happen, so you guys are going to need to adjust your expectations there. You guys are looking for the takeovers in the wrong areas if you think most explorers are the primary targets of the big boys.
>> In contrast, every year there are over a dozen Take-Overs of distressed Producers, Single-asset Producers, or unloved and forgotten Developers. That is the M&A sweet spot, and the companies to target to get in front of M&A activity if you want to be on the receiving end.
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3) Lets start with the Producer takeovers:
> Look at what we just saw with the recent announcement the takeovers of distressed producers like SEMAFO, Alio Gold, TMAC, and Guyana Goldfields, or bolt-on single-asset producers like the takeover over Detour Gold by Kirkland Lake. Everyone knew SEMAFO, Alio Gold, TMAC, and Guyana Goldfields were struggling, and everyone knew Detour was a cash cow that would eventually get taken over by a Major.
—-> That’s the recipe you are looking for!!
>> Think back to the takeovers that stick out from the last few years (beside the Mega Mergers of Majors) and they are NOT Majors taking over Explorers. They are either really advanced Developers near production, or more often bolt-on producers for the Mid-tiers that acquire them: Newmarket Gold, Claude Resources, Lakeshore Gold, True Gold Richmont, Klondex, Detour, Metanor, Marlin Gold, Avnel Gold, Avesoro Resources, Rye Patch Gold, Primero, etc…
>>> We had discussed all of those older takeovers BEFORE they actually happened and I was in all of those just prior to takeovers, (except Claude, because I had sold out too soon before they got grabbed). The reason why is because they were so obvious as targets.
In the late summer of 2017 someone asked who we felt the next takeover targets would be and I said (RIC) Richmont and (KDX) Klondex would be next. I got immediately chastised by 2-3 prominent posters there saying they were both struggling and garbage and why would anyone want those dogs. Well (AGI) Alamos Gold acquired (RIC) Richmont 2 months later [and Monarch got some of RIC’s properties as well], and (HL) Hecla acquired (KDX) Klondex n March 2018.
—> I reposted that thread for those posters to see it all grouped together once the news broke, and it was crickets from them….. Those takeovers were hiding in plain sight and almost everyone was too conditioned to look for only the “best of the best”, and simply could not imagine that it was really the “Best of the Worst” that the larger producers wanted.
> Another example:
In 2017 over at ceo.ca e were naming who we felt the next West African takeover would be and I threw out (AVK) Avnel Gold, and most posters nearly threw up at the suggestion. When Endeavour Mining announced they were taking out Avnel Gold, many posters there wrote me in private messages — stunned that they were grabbed before so many others. I responded back that the big boys like good deals too, and can take a good asset and operate it much better than Jr developer or producer can.
>> So to recap: Either there are:
(A) quality assets in a distressed company that a big boy feels they can run better or
(B) there is a company just finishing up a turnaround, and when the big boys sense they are ready to finally make money then they pounce. (like what just happened to Alio)
Those are the kinds of companies investors should be searching for if they want takeover premiums, and not the hottest cult stocks of the moment.
>>>> Here are a few distressed producers or high quality Single-asset Producers just begging to be taken over right now to augment a larger producers production profile:
(AKG) Galiano [formerly Asanko], (HRT) Harte Gold, (NEE) Northern Vertex, (HUM.L) Hummingbird Resources, (ROXG) Roxgold, (ANX) Anaconda Mining, (SAM) Starcore International, (SGI) Superior Gold, (TRY.AX) Troy Resources, (NGD) New Gold, (MML.AX) Medusa Mining, (MND) Mandalay Resources, (TXG) Torex Gold, and (WGX.AX) Westgold.
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4) The other group that is primer for takeovers are the advanced Developers with known deposits, clear economic studies done at lower Gold prices, that are even more economic today. This is why Gran Columbia is taking over Gold X Mining right now.
In the past years there have been regular takeovers of attractive Developers like Reservoir Minerals, Dalradian, Continental Gold, Gryphon Minerals, NewCastle Gold or unloved and forgotten developers, Barkerville Gold, Golden Reign, Savary Gold, Beaufield, Merrex Gold, Kiska Metals, Anfield Gold, Pershing Gold, etc…
… or how about the failed attempts at taking over Dolly Varden, or Maritime Resources?
>>> There are about 100 Advanced developers that seem likely to be takeover candidates in the Gold space, because at one point they will be developed into mines.
A few that come to mind are Marathon, Minera Alamos, Sabina Gold & Silver, Orezone, Osisko Mining, Treasury Metals, Triumph Gold, West Kirkland, Probe Metals, Orca Gold, Bonterra, Novagold, Seabridge, Bluestone Resources, Gold Standard Ventures, Falco Resources, Midas Gold, Corvus gold, Maritime Resources, etc…. There are a lot of them, but they have been derisked, will get revalued higher as metals prices rise, and have the takeover aspect as a kicker and liquidation event to exit one’s position into.
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5) There are investors that are in the companies doing the acquiring, and investors in the companies getting acquired, and there are positives and negatives for both groups in any acquisition.
> To only look at it through the lens of wanting to get a great premium in the company being taken over, and getting disappointing if they are just 40-60% premiums at the share prices lows is kind of a “glass half empty” approach. Yes, everyone loves a good takeover of a company moving steadily higher, because the M&A deal is the icing on the cake, but sadly that is now how most producers buy. Most want a deal and want to pick off good assets when there is blood in the streets, just like investors do. As a result, many takeovers come when the company being acquired is swirling the drain.
>> With many of these distressed companies, there are investors that get in right before the merger, for just the very reason of getting positioned before the big boys go shopping. One of the sub-sectors I look for is the “Best of the Worst” where there is a quality asset that is a dog and I buy when there is blood in the street and over and over have had nice scores doing this, or have caught a few turnaround stories if they dig themselves out of the hole.
I got in when things looked bleakest for Richmont, Klondex, New Market Gold (via the predecessor Crocodile Gold), Metanor, Lake Shore Gold, Corex, Avnel Gold, etc… so when the premium came, it was a nice score. I actually had just gotten in TMAC for the same reasons about a month before this merger, but jumped back out because I felt they may have a dillutive financing or go bankrupt, but it was the right idea.
No, long suffering shareholders don’t get rewarded in those transactions, unless they averaged down, but they were the same people that held a loser for years so that is on them. The takeover premiums don’t go to folks like that, but to the bottom fishers.
Example: If someone held onto Guyana Goldfields from $8 down to $.80 then I have little sympathy for them that the takeover premium didn’t make them whole.
Instead of looking for the bloated and often overpriced best of the best, more investors should be researching companies with flaws that are wounded, that other larger producers believe they can take over and do a fixer upper. Those are the ones to bottom fish, and that is not without risk, but the odds are much higher a bigger fish will eat them.
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>>> Lastly, there are investors in the larger companies, that are doing the acquisitions, that are thrilled to see their companies doing a great deal and reel in a win. I’ve often celebrated when a good management team picks off the weak and wounded for pennies on the dollar as it really solidifies that new larger company. When Equinox picked off the mine from New Gold on the cheap that was a great deal for them, but not for New Gold. That is the nature of a buyer’s market and no different than real estate or collectibles, or any other asset class that someone gets a great deal on.
> Example: That is how I felt up until this week about (SVM) Silvercorp making the initial offer to nab (GUY) Guyana Goldfields on the cheap. I was happy they were getting such a steal, but it appears they have now been outbid by Gran Colombia. Still there is the excitement of knowing you just got a deal, that was overlooked in your comments today.*
>> Another Example: When Primero (P) was being raided, at the time I was pissed in how it was going for them, but I also owned McEwen Mining (MUX) that scooped up Black Fox, Argonaut (AR) that gobbled up Cerro del Gallo, and First Majestic (AG) that got San Dimas. All 3 of those producers MUX, AR, and AG won big by being the acquirer and I was proud of those management teams for picking up good assets at a good price. *
>>> One more example: I was freaking thrilled when (USAS) Americas Gold & Silver picked up Pershing Gold for a song and a dance, and nobody challenged them. That was a huge score, as they are now showing, and at the time people belly-ached that it wasn’t a good deal for long-suffering Pershing shareholders. Who gives a flip about investors that sat in a sinking ship for years. I was thrilled to be on the side grabbing the good asset, because I believe in the team at USAS and knew they’d get it developed and into production and they have. *
*** That is the great side of these acquisitions that are being missed if you only look at the takeover premiums for companies getting poached. The other side of the equation is all the gains the acquiring companies are getting by doing the acquisition.

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Comments:
  1. On May 13, 2020 at 10:36 am,
    Zlatan says:

    Thanks for highlighting this, Cory, otherwise would have missed it. Great stuff as always, Ex. Time for you to start a newsletter 🙂

    • On May 14, 2020 at 9:01 am,
      Excelsior says:

      I didn’t even see this was posted until this morning. Thanks Zlatan.

      Cory – thanks for posting my M&A rant. I hope it helps give investors a few ideas. 🙂

  2. On May 13, 2020 at 10:44 am,
    OOTB Jerry says:

    EX…….is one of the BEST Around……..people should give him a LOT OF CREDIT…..

    • On May 13, 2020 at 10:46 am,
      OOTB Jerry says:

      On May 13, 2020 at 6:16 am,
      OOTB Jerry says:
      Great read………this (your) article needs to be published……..tremendous amount of forethought, along with your gained experience over the last ten years, contained within. We should put it in the KER HISTORY BOOK…..Lot of valuable info contained inside….

      Reply to this comment
      On May 13, 2020 at 6:58 am,
      Excelsior says:
      Thanks OOTB. I follow the M&A transactions closely, and appreciate the kind words.

      Yeah, maybe it will all go in the KER History Book one day…. (lol) 🙂

      Reply to this comment

      • On May 13, 2020 at 11:23 am,
        Whit says:

        Excelsior…a class act as always…I read this information with my portfolio in mind!

        • On May 14, 2020 at 9:04 am,
          Excelsior says:

          Hey Whit. Thanks for saying so, I normally feel more like a class clown. 😉

          Hopefully we can all keep sharing good ideas that help our portfolios grow. Ever Upward!

          • On May 14, 2020 at 11:40 am,
            Whit says:

            😃

      • On May 14, 2020 at 9:03 am,
        Excelsior says:

        Thanks OOTB. I really appreciate the kind words. Right back at ya sir!

        I’ve appreciated your insights for nearly a decade now, and appreciate you insights.

    • On May 13, 2020 at 1:37 pm,
      David says:

      00TB:
      Ex is one of the most knowledgeable, thorough and professional contributors on the boards. He goes out of his way to help us all.

      • On May 13, 2020 at 1:56 pm,
        OOTB Jerry says:

        David….DITTO ….I have been saying that for a LONG TIME……been here for 11 yrs….knew Ex, when he was shad….Shad , has done a lot of learning… …Now, he has become what I would call an expert…..

        • On May 14, 2020 at 9:10 am,
          Excelsior says:

          Thanks again sir. When I came here I was reading your thoughts as Jerry…. The Long… OOTB and your antics with IrishTony.

          Then I watched you evolve into The Claw…. then The BOOT, then Frank from Moscow, then Contrarian’s Contrarian Frank, then CCF, and now back to OOTB Jerry.

          I’m not sure about being an expert in anything, but I’ve made a lot of mistakes, and learned a few things through the school of hard knocks, and like to share ideas with the good folks here at the KER, in the hopes of us all being better informed. There have definitely been many people, such as yourself, that have helped me over the years and I appreciate anyone that posts good info here to help everyone.

      • On May 14, 2020 at 9:06 am,
        Excelsior says:

        Thank you for that post David. I feel the same about you and always look forward to finding out what companies you are reviewing and love that we have a nice forum like this to keep sharing good ideas (and a few laughs!)

  3. On May 13, 2020 at 11:11 am,
    charles says:

    Great stuff from Ex. Thanks for posting Cory. So Ex, what is your favorite to be the next takeover today?

    • On May 14, 2020 at 9:21 am,
      Excelsior says:

      Thanks Charles. I was surprised a daily forum rant got posted but hopefully it gets our wheels turning for opportunity.

      As for the next takeover, it may come out of left field but had 2 segments up above where I listed some of the Gold producers and developers that may be on the menu. I didn’t really get into the Silver stocks much, or Base Metals, or Uranium but I’ll just repost the mostly Gold focused ideas below again:

      >>>> Here are a few distressed producers or high quality Single-asset Producers just begging to be taken over right now to augment a larger producers production profile:

      (AKG) Galiano [formerly Asanko], (HRT) Harte Gold, (NEE) Northern Vertex, (HUM.L) Hummingbird Resources, (ROXG) Roxgold, (ANX) Anaconda Mining, (SAM) Starcore International, (SGI) Superior Gold, (TRY.AX) Troy Resources, (NGD) New Gold, (MML.AX) Medusa Mining, (MND) Mandalay Resources, (TXG) Torex Gold, and (WGX.AX) Westgold.

      [there are others I could add that may get a surprise bid for their producing mines that are doing well like Jaguar, Premier, Fiore, Steppe, Sandfire, or maybe even Wesdome as they would be nice bolt-on operations but I feel like the names mentioned previously will be more likely targets]

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      >>> There are about 100 Advanced developers that seem likely to be takeover candidates in the Gold space, because at one point they will be developed into mines.

      A few that come to mind are Marathon, Minera Alamos, Sabina Gold & Silver, Orezone, Osisko Mining, Treasury Metals, Triumph Gold, West Kirkland, Probe Metals, Orca Gold, Bonterra, Novagold, Seabridge, Bluestone Resources, Gold Standard Ventures, Falco Resources, Midas Gold, Corvus gold, Maritime Resources, etc…. There are a lot of them, but they have been derisked, will get revalued higher as metals prices rise, and have the takeover aspect as a kicker and liquidation event to exit one’s position into.

      I didn’t name some obvious high quality advanced Explorers like Great Bear, Irving, Lion One, Aurion, etc… but there are of course those kinds of widely followed names that may have gotten the attention of the big boys as well.

      Cheers!

  4. On May 13, 2020 at 1:20 pm,
    Marty says:

    One thing is for sure, Silvercrest isn’t going to be swindled, raped, drawn & quartered by SSRM as Golden Arrow(ERROR) was 9-10 months ago

    • On May 14, 2020 at 9:28 am,
      Excelsior says:

      Agreed Marty. In the Silver space, Silvercrest is the most obvious takeover target, and they have had a simply amazing run to the upside, so their takeover will be celebrated at the final win and icing on the cake. That takeover will provide the kind of liquidity event and nice gains, that I believe we’d all like to be part of.

      SILV did it last time, and I had rode their prior incarnation all the way up and got that experience when First Majestic took that company over, and initially had the spinout into the modern day Silvercrest in the beginning of this new bull run, but sold out earlier on. However I recently got positioned in Silvercrest again during the March selloff and have been trading in and out of it the last 2 months.

      It kind of reminds me of the success trajectory that Atlantic Gold took from explorer, to developer, to producer, to take out victory. I’m expecting the same for Silvercrest.

      Yes the SSRM / Golden Arrow (Error) was a dismal example of a takeover fail for the company being acquired (and they never should have given up 25% of production with a skilled operator like SSR Mining). I reminded me of when Rye Patch sold their cash-flowing royalty years early and was a real head scratching moment, and quite near-sighted.

      However, as mentioned above, on the other side of the equation that was a huge win and score for SSRM and their shareholders, because they got an amazing deal to and took over 100% ownership. So there are 2 sides to every transaction.

      Thanks for all your company picks and updates Marty. Always top notch!

  5. On May 13, 2020 at 4:35 pm,
    FloridaGent says:

    Thanks for reposting a very interesting read. Gives one a lot to think about. Nice to have a civil forum!

    • On May 14, 2020 at 9:29 am,
      Excelsior says:

      Thanks FloridaGent. It is always nice to have a group of like-minded individuals looking at opportunities, and as much as possible in these wild times keeping things civil.

      Ever Upward!

  6. On May 14, 2020 at 10:15 am,
    Mj12 says:

    Mahalo excel. Sure appreciate your diligence. Do you still hold mxsg?

    • On May 14, 2020 at 12:44 pm,
      Excelsior says:

      Hi Mj12 – Thanks. Yeah I still have a position in MXSG but just a small one. They are finally producing gold at low costs, but they don’t get much market attention because of their market cap, limited OTC US listing, small board (with only 2-3 key people) and I don’t believe those that have spent time following them expect them to produce enough gold to get noticed this year.

      Personally, I believe Mexus could really surprise folks as they ramp up their gold production, but they need to produce in a week or in a few days what they are doing currently in a month, to get a little traction and generate enough funds to get investors interested.

  7. On May 14, 2020 at 1:36 pm,
    Mj12 says:

    Nice brief.

    Maybe I should stop by the mxsg office in Carson this afternoon.. to see if there is life.

    • On May 14, 2020 at 6:39 pm,
      Excelsior says:

      That would be very insightful if you could report back on a Mexus “site visit”. 🙂