Another Miner Merger and More Gold Sector Consolidation
Kitco Commentaries | Opinions, Ideas and Markets Talk
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On September 30th, we had an announcement of a second miner merger proposal after the recently concluded Denver Gold Forum. North and Central American focused silver miner/developer Americas Silver (USAS) announced that it has agreed to acquire Nevada-focused gold developer Pershing Gold (PGLC) at an implied value of $56.7 million. Under the terms of the deal, Pershing shareholders will receive 0.715 Americas Silver shares for each common share held, which implies a value of $1.69 per Pershing common share and reflects a 39% premium to Pershing's closing price last Friday on the NASDAQ.
Relief Canyon, Pershing’s flagship project, is very high-margin with a pre-tax net present value at a 5% discount rate of $118 million and a pre-tax internal rate of return of 71% at spot gold prices. The district scale sized property is only 20% explored with plenty of blue-sky potential. Pershing has also raised over $90 million over the past several years in developing Relief Canyon, so I feel Americas Silver is getting a very good deal during a depressed market.
According to Americas Silver CEO Darren Blasutti; “Simply put, this is a great project from our perspective. There are very few oxide heap-leach, open-pit mines with low capital intensity available today. Whether the gold price is good or bad, the rationale to own this mine is there.”
The announcement came on the heels of last week’s blockbuster deal of Global miners Barrick Gold (ABX) and Randgold Resources (GOLD) announcing they have agreed to merge in an all share, no premium transaction which will solidify Barrick as the world’s largest gold company by production. A few days after the merger was announced, Barrick executive chairman, John L. Thornton, bought $25.2 million worth of shares in the company. The increase in M&A activity has historically taken place near major bottoms as it increases generalist attention to the sector.
Meanwhile, the gold price has seen some safe-haven buying this week on the back of a stronger U.S. dollar. On Tuesday, gold reversed course and ran up over $15 towards resistance at $1220 in December Gold along with a rising greenback. The rise was mostly attributed to an Italian government official stating the country would be better off with its own currency. However, December Gold sold off into the close on Tuesday and continues to trade just below its 50-day moving average. This moving average has been a strong technical resistance level gold has been unable to close above since it broke harshly below it in late April.
The GDX had a gap up move on the news this week, but the rise was also halted at its 50-day moving average. The major miner ETF is attempting to put in a bullish inverse head & shoulders bottom, which may be confirmed, or denied, on the back of this mornings highly anticipated U.S. Non-Farms Payroll (NFP) report.
A few more signs of a possible bottom being created in gold stocks is the inverse head & shoulders pattern also forming in the GDX/GLD ratio, along with the breakdown in the gold/silver ratio. Gold stocks, along with silver, tend to lead the metals higher once a major bottom has been put in place.
Gold has been down six consecutive months, which is the longest monthly losing streak since the secular bull in bullion began at the turn of the century. Moreover, the Commitment of Traders report (CoT) is more bullish than the December 2015 bottom, as Commercials have been net-long for four consecutive weeks. Commercial traders, who are considered the smart money, have not been net long since 2001 as well.
The technical levels to watch on a weekly closing basis in December Gold are $1211 on the upside and $1194 on the downside. The first to be taken out on a weekly basis close should tell us which way this two- month consolidation in the sector will break as we head into the next FOMC meeting on November 7-8th.
Caution is still advised and a large cash position in your junior resource stock portfolio is recommended. Stop by my website at www.juniorminerjunky.com and sign up to be on the free email list. You will receive this column in your inbox each week, along with interviews and updates on my subscription service availability.
Full disclosure: I have begun to accumulate shares of USAS this week and have recommended this company to my subscribers. I purchased the shares in the open market and do not receive any monetary compensation, or stock options from any of the companies I invest in, or discuss in my Kitco weekly articles. Please do your own due diligence before purchasing shares in any of the companies mentioned in this article.