Contributed Commentaries
Miner Merger Monday Followed by FOMC Fun Day
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
When I opened my inbox on Monday, I was happy to see the news of three miner take-over deals which could possibly be the beginning of more to come in this undervalued sector. It is no secret to sector professionals in the mining space that gold production has peaked and global miners have been high-grading, while running out of economic ore to produce. There is a dearth of quality pipeline projects at many of the majors and a number of single asset producer/developers struggling to find incremental buying to fund projects. So, it has not been a question of IF M&A was going to be heating up in the mining space again, but more a question of WHEN.
The first deal was Hecla Mining (HL) announcing its intention to acquire all issued and outstanding shares of Klondex with a mix of cash and shares for US$2.47 (in cash/stock) plus a stake in a new company, Klondex Canada, created to hold Klondex's Canadian assets. If this deal is approved by shareholders, the company will add a district scale sized high-grade gold project in Nevada which contains three mines and two mills to its already formidable stable of mostly silver-based mines. Hecla would also become a more diversified gold and silver mining company, as opposed to being a mostly silver producer.
The second deal was Rye Patch Gold Corp (RPM.V) announcing they have entered into an agreement whereby Alio Gold (ALO) will acquire, through a plan of arrangement all of the outstanding shares of Rye Patch. The transaction values Rye Patch at C$128M, based on 0.48 common shares of Alio Gold per Rye Patch and existing Alio Gold and Rye Patch shareholders will own approximately 53% and 47% of the combined company, respectively. This deal will give Alio shareholders welcome jurisdictional risk diversification. The company’s high-grade Ana Paula Project resides in the Mexican Guerrero Gold Belt, where over 31 million ounces of gold has been discovered since the early 1990’s but has also been regarded as a dangerous place to operate.
The third deal was a lower-profile hostile take-over of junior miner Anaconda Mining (ANX.TO) intending to make a formal offer to acquire all of the issued and outstanding common shares of micro-cap explorer Maritime Resources Corp. (MAE.V). Anaconda offered a premium of 40% to the closing price of Maritime's stock the previous Friday, as it seeks to bring the Hammerdown and Orion gold projects in Newfoundland under its control. With the Maritime board appearing unresponsive, Anaconda has decided to go directly to the shareholders of Maritime.
A few days after these proposed deals were announced, newly appointed Fed Chair Jerome Powell did not disappoint the gold space when he delivered the long-awaited FOMC meeting speech on Wednesday. Just like previous rate increases since 2016, the quarter-point interest rate hike became a “sell the rumor and buy the news” event, as the gold price zoomed above $1330 after the announcement. The Fed now sees a total of 8 quarter point hikes until the end of 2020. Three this year, three in 2019 and two in 2020, with rates ending up near 3.4%.
Many economists had expected the Fed to pencil in four rate hikes and prior to the meeting financial markets were pricing in an almost 40% chance of four moves. When the gold sector took off higher on short covering and bargain hunting after the news, equites made a strong reversal to the downside. This gold stock/equity dis-connect is a welcome occurrence to miner investors and has been a missing piece to the gold bull puzzle since the U.S. equity correction began earlier this year.
The GDX, now priced at $21.50, is roughly in line with where it was trading after the previous rate hike was announced in December, even though the gold price is nearly $100 higher. So, the gold stocks have some catching up to do once the market begins to price in a possible $1300 floor in bullion. A solid close above $1330 at the end of Q1 next week would mark a breakout on the quarterly chart and I believe the miners would begin to run higher in rapid fashion if this takes place. Moreover, a strong close above the $26 level in the GDX would be the confirmation of a long-term bottom being technically confirmed in gold stocks.
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