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Exploration slashed, takeovers ahead - but who will get premium bids?

Commentaries & Views

I dislike using such a shopworn phrase as “perfect storm,” but that’s exactly what may be brewing for certain junior resource companies: gold and silver plays with takeover potential.

I see three powerful forces combining to make this so:

  • There was major consolidation at the top of the food chain last year. Barrick Gold bought Randgold. Newmont bought Goldcorp. The two biggest kids on the block have been digesting their acquisitions ever since. That’s put a greater priority on monetizing non-core assets to clean up balance sheets and rationalize portfolios than on making new acquisitions. With less pressure from the top, I think we’ve seen less merger and acquisition (M&A) activity than we’d otherwise have seen.

  • The COVID-19 shutdowns have forced all affected producers—which have high fixed costs—to react immediately, strongly, and very defensively. As they always seem to do, the first thing producers cut when they’re worried is exploration. A new S&P Global Market Intelligence report is already citing a 29% drop in exploration budgets this year. I don’t blame them. When an entire country—or several—shuts down your mines, you have to cut costs. But mining is, by its nature, a self-depleting business. If producers don’t explore, they mine themselves out of business. It’s either that or buy resources from explorers who make economic discoveries.

  • Due to the shutdowns, some exploration companies had to slow down or suspend activity temporarily. They’re all ramping back up again. Spring in the Northern Hemisphere is actually a time when many exploration camps wind down for a time anyway. The companies need to go over winter results and formulate plans for summer exploration. In some places, work is impossible while winter ice is breaking up and everything turns to mud. Point is, I think most explorations companies are going to do just as much work this year as they would have without the COVID-19 shutdowns.

These three factors bring me to one clear conclusion: successful explorers will have assets that larger companies will be very keen to acquire in the post-COVID-19 world.

Why does this matter?

Because takeover bids are usually at a high premium for shareholders of the company being bought. In a bear market, this can turn a loss into a last-minute gain. In a bull market, it can turn a somewhat positive outcome into a spectacular win.

Most takeover offers seem to range from a 30–50% premium. For example, Wallbridge Mining just paid a 46% premium for Balmoral Resources. But sometimes it’s much higher:

  • In 2017, Sandstorm Gold took over Mariana Resources at an 88% premium over the 20-day volume-weighted average price (VWAP).

  • In 2016, Seabridge Gold bought Snip Gold at a 115% premium to the 30-day VWAP (which was 124% over the share price the day before the announcement).

  • In 2018, First Majestic took Primero over at a whopping 200% premium to the 20-day VWAP.

Great—for those who get in before the takeover offer.

This means we need to know…

What makes for a good takeover target?

I covered this in an article I wrote in February, just before COVID-19 stopped the world in its tracks.

I said then that a tsunami of takeovers was coming, but not right away. We had time to build positions in the right stocks. I was right.

I tip my hat to those who bought great takeover targets during the March meltdown—I think you’ll do very, very well.

Today, I still wouldn’t say my expected wave of takeovers is urgently imminent.

That’s a good thing, because it means we still have time to buy with discipline, if we start now.

When might pay-day arrive? Well, the best of these stocks will go up with gold and silver anyway. But with many producers having slashed their exploration budgets, I think the surge in takeovers is coming closer. The perfect storm will be all the more powerful when it arrives.

In saying this, I’m speaking of the gold and silver space. But in due course, producers will need to acquire companies with major new discoveries in the industrial mineral space as well.

I should mention that takeover potential is something I include when I cover stocks in My Take. That’s our growing database of summary analyses of companies in the news or requested by readers.

But this strategic consideration—preparing now for a massive increase in M&A activity—is all yours, free of charge.

Caveat emptor,

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.