Merger and Acquisition Opportunities In The Metals Resource Stocks – Part 1A
Excelsior Prosperity w/ Shad Marquitz - 05/05/2024
Every week and every month, when speaking with resource investors and the company management teams of junior mining stocks, the topic of (M&A) Mergers and Acquisitions comes up as a hot button issue. For many investors and most companies, M&A deals are seen as a net positive force in the sector, which provides a liquid exit strategy from the position held in the company being acquired. As investors decide to exit the company being acquired at a premium, this then frees up that capital for positioning into other resource stocks. It also starts the speculation and gets the animal spirits moving again in the sector as to which other companies will be acquired or merge next.
Mergers and acquisitions allow companies to grow in market cap, as well as the size and scale of projects in their portfolios. This massing up expands their overall profile to gain more investor attention, improved trading liquidity, and a better cost of capital. Often these M&A transactions can serve to lower overall company costs by acquiring valuable assets with superior economics. Other times, these deals allow companies to diversify jurisdictions reducing their perceived risk premium, or they can also serve to reduce competition within a certain country or commodity of focus. Additionally, these deals combining companies will seek to exploit synergies between project operations, district area plays, and management teams.
There are, however, times where long-term holders of a given stock that is being acquired get frustrated at the takeover news from a larger entity scooping it up at a low valuation level. We’ve referred to those transactions in this sector for years as the proverbial “takeunders,” from the vantage point of long-suffering shareholders, still holding an equity at a substantial loss after a long corrective pricing pattern. Even after factoring in a 30%-50% takeover premium, some shareholders are still not made whole, or only experience a small profit, due to how depressed the share price has fallen over time. Then if it is a “mergers of equals” transaction, there may be no premium at all, or only a 10-20% premium for shareholders of the lessor valued company, and this can cause a lot of grumbling from the peanut gallery.
A M&A deal also truncates any potential rerating higher in a better sector sentiment or rising metals price environment, and those spoils go to the new acquiring company or new merged company. There has rarely been a merger or acquisition that doesn’t have some contingency of angry investors that were hoping for a different rosier outcome for the stock they were in. That’s what makes a market.
However, there are 2 sides to every transaction - a buyer and a seller. For the acquiring company and buyer of the other company (which is selling for pennies on the dollar), it is typically a very savvy purchase of an undervalued asset, that can really boost their development and production profile in a meaningful way. Investors have the perpetual mantra of “buying low” and then seem quite surprised or caught off-guard when smart companies do the very same thing and buy other companies on the cheap.
That isn’t to say that some M&A deals haven’t been confusing to existing shareholders, seeming to lack any synergies or logic, and may end up being net losses for the acquiring company. We have seen development projects bought for a pretty penny that never got built, and producing assets picked up that ended up being nothing but a migraine headache for the new suitors.
This brings in another wrinkle into M&A transactions, through the reactions and actions taken by investors positioned in the company doing the acquiring. There are times where the holders of a given company, are simply thrilled about the news that this entity is taking over another solid company to add in a new project or portfolio of projects. Then there are times where many shareholders are flat out confused by the logic of the transaction, or the accompanying dilution, and thus sell the acquirer on this news, or poison the well of perception for the announced deal in the marketplace. It is not uncommon to see a collection of activist investors contact lawyers that are only too happy to try and sue the management team, or if nothing else, vocal online investors publicly boo and hiss calling for management’s head on a stake.
There is simply no way to make everyone happy. Having said that, I’ve noticed that solid companies get out in front of this process right away and message to the marketplace why they are making the acquisition, any synergies between the two companies and management teams, and the value proposition of the new pro-forma combined business entity.
I want to kick off this series with a review of some of the M&A transactions we’ve seen in this most recent cycle. In particular, the goal in this series will be to highlight the deals where we’ve seen the mid-tier or larger producers acquiring the juniors, along with the string of mergers between 2 companies in the mid-tier and junior resource stocks. As this series of M&A articles evolves, we will also start looking at the field of companies that appear to have the ingredients to be the next merger or acquisition candidates.
Undoubtedly the overarching theme that most market participants and even generalists looking at this sector from afar have pointed to for the last few years has been the big boy companies merging with other big boy companies. Newmont and Gold Corp merged, and then Barick and Randgold, then Pan American and Tahoe Resources, Silver Standard (now SSR Mining) and Alacer Gold, then Agnico Eagle and Kirkland Lake, then BHP and Oz Minerals, then Goldfields and Yamana Gold, and most recently Newmont merging with Newcrest Mining, and the ongoing saga of BHP trying to acquire Anglo American.
These have all been huge “mega-mergers” the last handful of years, but those aren’t the kinds of transactions that really help the juniors or get resource investors jazzed about takeover premiums or that free up capital to speculate on new companies. As a result, we aren’t going to spend much time on those transactions in this series. It should also be pointed out that clearly those companies that have massed up in size and scale now have their hands full, and are less likely to be the companies leading the charge with acquisitions. In fact, many of those larger pro-forma companies have been divesting non-core assets to the mid-tier and smaller producers, or vending them out to juniors that want to explore and develop projects that have been on the shelf for years.
What most investors in junior resource stocks really want to see is a well-priced takeover acquisition of a company that they invest in by a larger entity for a solid premium. Again, if the transaction occurs nears a low trough in valuation, as a “takeunder” then most will still feel robbed of the rerating experience, but sometimes that escape hatch from a stock can at least salvage capital to be redeployed into a better growth opportunity. Ideally, a stock will have run higher in share price on the back of true value creation and recognition in the marketplace, and then receive an acquisition offer by a larger company, where the takeover premium is the final cherry on top and exit scenario for investors. Unfortunately, in real life, that is not a common situation. Most transactions happen when companies valuations are low.
Then there are the merger transactions, which are more commonly share-based (although sometimes there is a cash component), but these deals are often at no premium or at a lower premium for the smaller company involved to shore up any imbalances. These typically do not animate the markets in the same way that true takeover acquisitions do, but sometimes they are actually better in the longer-term for investors that stick with the new combined company. The idea here is to bring together two similarly valued companies or stage companies to grow the new pro-forma company into a larger entity with proposed operational synergies, a larger production or development profile, or better costs by reducing redundancies, or just to attract a larger pool of investor interest. Sometimes this allows for consolidation of a jurisdiction, or diversification between two jurisdictions.
I’ve personally been through a few dozen takeover and merger transactions within my portfolio over the last 14 years (through either the company being acquired or the company doing the acquiring), and the reality is that most of them are predatory deals executed when another company is distressed in operations or value. In a number of cases, I positioned shortly before the transactions occurred specifically for the takeover trade, figuring that some offer would be coming in eventually, and other times these deals came out of left field where nobody was expecting the news.
Sometimes the business combination made all the sense in the world once announced, and other times the transaction left many scratching their heads in bewilderment at the time the news broke and for a long time afterward. In some instances, companies bolted on projects in jurisdictions or other commodities that didn’t seem to have many synergies, whereas other times the acquisitions seemed like a perfect hand-in-glove fit operationally. Sometimes it was just a merger of equals a stronger combined market player, where the two investor groups were thrilled in a 1+1 = 3 scenario. Other times it became a civil war of attacks and insults from members of both sides of the transaction, and this killed the momentum in those stocks for a long time afterward. It’s a mixed bag…
We’re going to cover all types of these transactions in this series: the good, the bad, and the ugly.
In this (Part 1) we are going to start off with a number of the deals we’ve seen in this most recent M&A cycle, mostly focused around gold, silver, and copper mining stocks just to narrow the scope. There have been a fair number of notable mergers and acquisitions in the lithium, uranium, nickel, and other critical minerals space as well, but it’s just too large of a topic if we get into all of those in this particular series. It would be even broader if we were to also cover all the transactions in the oil & gas space, as there have been a slew of them in the traditional energy space. We may occasionally touch on those transactions individually in other series on this channel or in other articles when looking at individual companies.
Now, let’s get into the deals that have been on the traditional metals investors radar the last couple of years, so that in future articles we can look at which companies could be next on the menu.
It seems appropriate to kick things off with the last really big win seen in the gold space that closed back in early 2022… That being, of course, the acquisition of Great Bear Resources by Kinross Gold.
There was a very unique sequence of events leading up to the takeover deal. Most investors had noted Barrick Gold positioning in prospective exploration tenants on either side of the Great Bear Resources land package, (via placements in adjacent junior exploration companies), as a clear signal of trying to consolidate the district first. Many investors (me included) speculated that they’d be the natural suitor for Great Bear, with other larger companies like Rio Tinto or BHP or Newmont possibly being contenders.
The reality was that everybody was waiting for the company to put out a resource estimate as a first step, to quantify exactly what they had defined so far with all their drilling to date. Then out of nowhere, and before there was even a resource estimate, (much less before there were any economic studies completed – No PEA, PFS, or FS), Kinross Gold swept in and took over the GBR without any counteroffer from any of the other big boy producers. As a result this led many to speculate that Kinross overpaid for Great Bear, but that still remains to be seen as they continue to work on developing the project. Many still believe that it’s a transformative asset.
This acquisition was a somewhat complex transaction with a mixture of shares and cash, and then another Contingent Value Right kicker based on the resource reaching a certain size (8.5 million ounces) and moving into production in a set time period by Kinross. [This also made it obvious that there was clearly not anywhere near that size of resource yet, despite so many wild proclamations from online punters that they’d already defined 10-15 million ounces at the time of this transaction]. Those CVRs are still in play… with a 10 year period.
Personally, I was very fortunate to have been positioned as a Great Bear shareholder at the time of the takeover news having been announced, and was thrilled at the news but admittedly sold my shares after the valuation plateaued, awaiting a counter-offer (which never came). We were fortunate at the time, over at the KE Report, to have been regularly interviewing Chris Taylor, President and CEO of Great Bear Resources (TSX.V:GBR – OTCQX:GTBAF), for the 2 years leading up to the takeover news, (so I’m biased in that sense in how I reflect on this deal).
Kinross completes acquisition of Great Bear - 24 Feb 2022
I think it fair to say that almost all investors made money on this transaction though, as Great Bear was taken out when it had already climbed up to near it’s highs. The acquisition came after a few seasons of stellar exploration drill results, and then the takeover premium spiked it up even further, so it really was a true win for both long-term and short-term shareholders alike. While the sector was more used to win-win transactions where companies were taken out at all-time highs like this in the prior 2001-2011 bull market in the precious metals, this GBR takeover stood out as unique, like spotting a wild unicorn in the PM sector environment of late 2021 – early 2022, and really it has continued to stick out as an anomaly ever since then.
The good news is that with gold, and silver, and copper starting to move higher once again, and the related resource stocks starting to finally wake up, I think we are going to see more true takeovers moving forward, versus the takeunders we’ve seen the last few years.
However, if we review a number of the deals we’ve seen since the Great Bear takeover by Kinross Gold, which kicked off this modern M&A cycle, (or even in the several years leading up to it), it has been much more the typical story of the larger companies picking up the smaller companies on the cheap.
There have been only been brief periods of bullish activity in the resource stocks for the last several years. The larger companies have been in the more fortunate position to be opportunistic and scoop up deals while the overall sector has been vastly undervalued. Many of the juniors acquired were either distressed operationally, stuck as far as being able to advance projects further on their own, or flat out depressed in valuations for their ounces in the ground.
Now we leave the land of dream deals and enter the realm of the real deals…
Just 5 months after one of the biggest M&A wins the PM sector had seen for some time was closed, Hecla Mining (NYSE:HL) took over (or took under) Alexco Resource Corp (NYSE:AXU; TSX:AXU) for what many long-time shareholders perceived of as a mere “song and a dance.”
After waiting for so many years for Alexco to finally get back into production, and then watching them floundering around and needing to keep diluting and raising funds for sustaining capital, it was clear they were a distressed small producer having a hard time getting escape velocity with a move into steady commercial production. To see Hecla swoop in and pick up their Keno Hill assets and mine on the cheap for a mere 23% premium, putting that legacy management team out of their misery, was not a surprise; but left a much more bitter taste in investors mouths regarding M&A deals.
Personally, I had done incredibly well position-trading Alexco shares since 2016 up until about mid-2021 during their very successful exploration and development phase. However, the mid-2021 through mid-2022 period was one of brutal share price destruction, wiping out a big chunk of the prior gains I had made, and leaving many longer-term AXU shareholders (that were not actively trading the shares all those years) completely devastated. The only consolation prize I had was that I was also a Hecla shareholder, so I just let my Alexco shares convert over to beef up my HL position even further.
Many investors were vocally upset though, and rightly so. The assets were very much high quality, but the plan to go back into production was flawed and the execution was lower than subpar, and this was reflected in the relentless market selling for the last year of Alexco’s lifespan. As a Hecla shareholder I was thrilled, but simultaneously as an Alexco shareholder I was very let down by the clear takeunder. Again, there are 2 sides to any transaction, and one should give the Hecla team props for buying while there was blood in the streets.
Hecla Acquires Alexco Resource - July 5, 2022
Just for continuity’s sake… Then under a year later, in February 2023, Hecla further consolidated more projects near their Keno Hill asset in the Yukon; by outbidding Victoria Gold for ATAC Resources (TSXV: ATC) (OTCQB: ATADF) and their Rackla and Connaught projects in Yukon, Canada. The team at ATAC Resources had done a good job in exploring and building out a resource, but didn’t really have the means to develop this project on their own, and in talking with the CEO Graham Downs, back prior to that same time period, they were always set on finding a further strategic shareholder or takeover partner as part of the company strategy.
Hecla Confirms Letter of Intent to Acquire ATAC Resources – February 21, 2023
This transaction also involved the spinout of some copper assets from ATAC into the newly formed Cascadia Minerals (TSX-V: CAM, OTCQB: CAMNF). This brings into the M&A discussion yet another nuance of the often created “SpinCo” during M&A deals, which we will touch upon in other transactions later in this series. This is one of another often overlooked value drivers in M&A deals.
Cascadia Announces Closing of Spin-Out Transaction with ATAC Resources Ltd.
July 10, 2023
It is at this point that I realize there is no way I can fit all of the other transactions I want to highlight over the last few years into this very first article (Part 1A), so you’ll see quite a few more transactions highlighted in (Part 1B) coming very soon. Whereas this article spent some time to lay down a number of key concepts and points with regards to merger and acquisition transactions, the next part will get right into a number of other transactions, and then summarize many of the key overall takeaways. Please hang in there if this seems like a history lesson. This is all leading towards starting the process of speculating on which companies could be good contenders for the next M&A deals as this series evolves into future updates.
As always thanks for reading and wishing you prosperity in your trading and in life!
- Shad