Hello everyone, on BNN call January 9th 2019, Dennis da Silva, managing director and senior portfolio manager at Middlefield Capital Corporation, discussed Royal Nickel: «I believe everybody that buys this thing or owns the stock currently is looking for a takeover». If drilling, resource and production results are significant at Beta Hunt Mine, development growth can follow many paths, here are some:
-Takeover;
-Organic growth;
-Merger;
-Joint Venture.
-Takeover: Beta Hunt has possible suitors as Northern Star Resources and Kirkland Lake Gold have visited Beta Hunt (said to @Mikeymike426). Goldfields is likely to have a vested interest as they own BH neighbour St Ives Mine and « the mining tenements on which the Beta Hunt Mine is located are held by Gold Fields Limited. Also, from the Kitco article Gold's 2019 High Of $1,300 To Trigger A Year Of Consolidation In Mining, BMO said: «We believe consolidation will be the industry trend for 2019. The most popular of which will be the nascent trend of producers straddling the Pacific, » the report noted.
With a «tepid gold price environment, » new explorations are no longer a priority for companies, which causes a global decline in larger producer output, the analysts pointed out.
«In order to stem this tide, it seems logical that the larger producers would deploy some of their now-improved balance sheets to acquire development assets or promising smaller producers that have run into capital constraints, » they said.
BMO’s list of possible mining companies looking to acquire includes Evolution Mining, Northern Star, Kirkland Lake, and Saracen. On the other hand, potential acquisition targets in 2019 are Atlantic Gold, TMAC Resources, Wesdome, Pretium, and New Gold.
«When we assume an all-stock deal with a 30% premium, most acquirers can transact accretively on most targets, » BMO said.
From Investors Need to Understand Basic Geology by Chris Wilson, president of Exploration Alliance, a niche consulting group: «We have to find 80 million ounces (Moz) of gold a year just to replace what is being mined. That is equivalent to the whole of the production from the Carlin Trend. Clearly, any company with a significant discovery will be extremely valuable. That value will grow exponentially moving forward because new discoveries are getting harder to find. The value most likely will be unlocked by the major companies buying the juniors out.
It is a big leap for a junior trying to be a miner. When the major companies are mining successfully, but not exploring successfully, acquisitions have to become part of the future. The trick will be finding juniors that have a commodity and a deposit style that are attractive to the majors.
There are probably 3,000 junior explorers on the Toronto, Australian and London stock exchanges. So, you have to do your homework. First, you discount the 20% that have managements with a reputation for pumping and dumping or that lack technical prowess. Next, you eliminate companies working in countries you do not like for reasons of geopolitical risk.
With a little bit of research, you can see where mines are being built successfully and where potentially good mines are not being built. For example, take Gabriel Resources Ltd.'s (GBU:TSX) Rosia Montana mine in Romania. This mine has been in existence since Roman times. It is a 10 Moz deposit that would make a difference to the region. It would remediate the legacy of 2,000 years of mining history. But, it has been shut down by popular vote and sentiment on the Internet.
Once you discard management and geopolitical risk, you have 1,500 or 1,000 names left. Next, you have to look at deposit style. Irrespective of grade, major companies do not buy small vein deposits with often complex and discontinuous ore shoots. Such deposits will always remain the remit of Junior explorers who may struggle to stack together resources or commercialize production. Neither do major companies want small copper mines with difficult metallurgy. It may take $4 billion to put a big copper porphyry into production. As an investor, you have to target companies with the potential of finding a deposit in the commodity of choice, probably copper, silver or gold, that has the chance to get the attention of the majors.
Of course, you want to look at the number of shares a company has out there and how much cash it has in the bank. If a company is going to have to raise money in the near term, that will be dilutive and something you want to steer away from.
You can go on to the System of Electronic Disclosure by Insiders (SEDI) to see if management has been selling their shares and have a look at the stock curve. If it is a typical up and down parabolic curve, it probably does that for a reason. Juniors with good assets tend not to have that parabolic curve up and down. They may have come off 20% or even 50%, but they are holding steady. What percentage of the shares is held with management? Put that into the equation.
By now, the list of 3,000 companies is probably down to about 100, and that is a manageable number of companies to do your due diligence on.
The last thing I would say is go and talk to a geologist. Not necessarily the company geologist, who will sell you any story the company wants. If you are going to invest in this commodity and you do not understand geology, you need to find a geologist that can help you. [..] Gold is a finite resource. You've got to find 80 Moz a year to be ahead of current annual production. So, from a supply and demand perspective, each year we're spending more in exploration yet finding less. All things considered, that means that good discoveries will be increasingly valuable. [..] Then you go to the other end of the spectrum to great mining jurisdictions where investments are safe: Canada, Australia, Peru and Chile to name a few. But, those countries have been through several cycles of exploration over the last 100 years, which means it is getting harder to find deposits there. »
-Organic growth is the process of business expansion by increased output, customer base expansion, or new product development, as opposed to mergers and acquisitions, which is inorganic growth. Organic growth like that of Kirkland Lake Gold is stellar and takeovers aren’t always in the best interest of shareholders;
-Merger, Kirkand Lake Gold and Newmarket Gold and why Eric Sprott might have preferred organic growth:
Eric Sprott, from Jekyll Island Series: «Reality vs conservatism: now as an investor like let’s take for example me looking at Kirkland Lake or Fosterville and by the way when I think about it now there was a big mistake of mine to suggest that Kirkland should take over Newmarket. I would have been better off keeping my 17% of Newmarket, thank you very much, instead of my 10% of Kirkland because it is Newmarket where the action is, so it was a mistake and of course when I think back about it, one, the CEO is not longer there, didn’t get it, maybe some of the people at the mine, I like to be conservative and of course all reporting back at their bosses who are in Vancouver [..] I think they are telling them we’re going to produce 140,000 to 145,000 oz this year. Why don’t we merge with Kirkland whose got things going on, and they didn’t recognize it that they have things going on. I said nobody told them, conservatism vs reality, it killed them, the opportunity they gave up, selling that thing to us was a joke, I should be criticized too, because I could have ended up with more, a higher percentage of that. »
Kirkland Lake Gold Inc. and Newmarket Gold Inc. merged creating a new mid-tier gold company, from the Kirkland Gold press release on September 29th 2016, highlights of the transaction:
-Creation of a new low-cost, mid-tier gold producer;
-Diversified production base;
-Production profile anchored by three high-grade, low-cost operations;
-Driving growth across two world class mining jurisdictions;
-Expanded discovery and exploration potential;
-Strong balance sheet and healthy cash flow generation.
Benefits to Kirkland Lake Shareholders
• Establishes the company as a high quality, mid-tier gold producer with a diversified production base and low production costs without adding development risk;
• Diversified production base creating a company that has a lower operating risk profile;
• Decreases overall production costs and strengthens the company's ability to withstand fluctuations within the gold market;
• Strengthens the balance sheet, increases ability to generate free cash flow and improves financial flexibility;
• Extensive exploration upside with recent high grade discoveries in the Lower Phoenix, Harrier and Osprey zones at Fosterville to provide continued positive share price catalysts;
• Creates second operating platform to further evaluate growth opportunities in another Tier 1 jurisdiction.
Benefits to Newmarket Shareholders
• Immediate up-front premium implied within the exchange ratio;
• Superior financial strength and flexibility to support a more aggressive exploration and development program at its Australian operations;
• Strong exposure to high-quality, high grade Canadian production base;
• Exposure to a diversified long-life reserve and resource base to support further growth.
• Increased trading liquidity, enhanced value proposition and capital markets profile;
Eric Sprott RNX holdings after PP closing, from the January 9, 2019 Short Form Prospectus, a staggering $22,436,409 CAD ($0.47 per share): « Sprott currently beneficially owns, directly or indirectly, or exercises control or direction over, approximately 41,216,042 Common Shares, or approximately 9.2% of the issued and outstanding Common Shares (on a non-diluted basis). At the closing of the Concurrent Private Placement, it is anticipated that Mr. Sprott will beneficially own, directly or indirectly, or exercise control or direction over approximately 47,737,042 Common Shares, or approximately 10.2% of the issued and outstanding Common Shares (on a non-diluted basis), assuming the closing of the Offering but no exercise of the Over-Allotment Option or the Private Placement Over-Allotment Option. »
-Joint Venture, an example: From Kitco Joint Ventures, Strategic Partnerships Provide Junior Miners Long-term Potential article: « Investors can expect to see more strategic partnerships and joint ventures in the mining sector as smaller companies look for sustainable capital flows, according to one mining executive.
In late May, Golden Arrow Resources (TSX.V: GRG) announced that it had completed a joint venture agreement with Silver Standard (TSX: SSO) to develop the Chinchilla Silver project in Argentina. As part of the agreement, Golden Arrow will receive a 25% stake in the mine, while Silver Standard operates the mine with a 75% stake.
The agreement also provides Golden Arrow with a 25% stake in Silver Standard’s Pirquitas mine.
Joseph Grosso, president and CEO of Golden Arrow, said in a recent interview with Kitco News that this venture provides major benefits for both companies. He explained that his company is getting about $1 million a month from this agreement and Silver Standard is able to expand its Argentine mining operations for at least another 8 years once the Chinchilla project is in production, which is expected to be in mid-2018.
“We are geologists not mining engineers or builders so it makes sense to partner with a company that has this expertise,” he said. “We are excited to be able to work with a company like Silver Standard to get Chinchilla in production.”
Grosso added that this agreement is an example of what he sees is a growing trend in the industry. He added that joint ventures allow exploration companies to leverage their expertise in finding deposits, leaving the development of the mine to more experienced players.
Grosso isn’t the only person who is seeing a growing trend of majors developing strategic partnerships with junior companies.
In a recent report, mining analysts at CIBC noted that so far this year, more 50% of the equity raised by junior gold companies listed on the Toronto Stock Exchange has come from direct investment from major companies.
“No previous year has exceeded 20%,” the analysts noted. “The increased activity of senior gold stocks investing in junior stocks may be motivated by the forecast gold production decline beyond the next five years. Larger gold companies need to plan now to address the future forecast production decline for the industry.”
In conclusion, $RNX future reality is speculative and CEO community will continue to research and defend the interest of RNX shareholders and potential shareholders, as our voices need to be heard to complement managements.
