On the Friday before PDAC 2017, Anaconda Mining announced plans to takeover Orex Exploration in an all share deal. This was a surprise for me, but in line with the strategic vision Mr. Angelo, CEO of Anaconda Mining, had conveyed to me in our first interview back in November. After doing some background work on the situation, I think it presents a very interesting example of the economics of a takeover in the junior mining space and it is my pleasure to share my initial thoughts on the deal here.
My first impression is that the two companies are complementary. I see this in terms of management teams: Anaconda has a proven operational team and Orex has capital markets experience; and in terms of corporate assets: Anaconda has an operating mine and Orex has a known deposit. Put it all together and what do you get? Hopefully, a situation where the whole is greater than the sum of its parts!
In other words, the deal will help resolve some of the main weaknesses of each company. Anaconda will gain a gold deposit that can "extend the longevity of Anaconda and potentially increase annual production to much higher levels" and may serve as one of the company’s first spokes to connect to their hub at the Pine Cove Mine. Orex stands to benefit as the deal will "reduce the time required to bring the Goldboro Project into production" and will "be supported by an experienced operations team", as per the news release. Notice that both Boards unanimously support the deal.
There are some other similarities between the two companies. For example, both have kept a relatively low profile over the last few years.
Anaconda has operated the Pine Cove Mine and used proceeds to fund improvements to the mine, acquire properties nearby, and conduct exploration. I think that money has been well-spent, as the company now has a nice pipeline of projects at various stages of exploration and development. Anaconda has done all of that without raising equity for a five period from 2011-2016. The ability to side-step the bear market but keep advancing the company's assets is a great achievement, in my opinion.
Now, it is nice that Anaconda has kept the share structure tight during the bear market, but never issuing equity can be problematic as you may lose some relationships with financiers and engaged shareholders. Anaconda seems to be aware of that and raised approximately $2M in flow-through in July 2016 with Red Cloud Klondike Strike, which helped put them on the radar for some new investors. That financing also provides additional benefits, such as ongoing analyst coverage and financial advise in the proposed acquisition of Orex.
I will admit that Orex is pretty new to me. I saw a lot of chatter on the company at CEO.CA on the company’s page and noticed that Orex seems to get lumped in with a few other companies that have had some fairly aggressive promotional activities in 2016. I will be curious to see if some of that promotional activity rubs off on Anaconda going forward, which would probably be a good thing.
As a tangent, allow me to mention "the perspiration-promotion ratio" that I first heard about from Neil Adshead at Roundup 2017. It’s a neat little idea for discussing juniors that may have some relevance here.
Both Anaconda and Orex have put in a lot of perspiration advancing their assets -- both have probably done more perspiration than promotion over the last few years. However, my initial sense is that Orex done more promotion than Anaconda per unit of perspiration, which means that Anaconda can almost acquire some promotion-power from Orex with this takeover. That may be stretching the idea too far, but the good side of doing more perspiration than promotion is that you (may) have something real to promote when you get around to it! I think both Orex and Anaconda have something real and I think they could be better together.
Although Orex is new to me, I have been impressed by the PEA and three technical reports that the company has released on the Goldboro Project. I certainly look forward to learning more about the project and the “slate belt” geological model.
The Goldboro Project is an undergound deposit with a lot of historical mining activity, which gives a good head-start on the geological understanding and ability to get things going again. See some excerpts from Orex's materials below.
My first impression from all this was: what is low-grade for Orex's may be high-grade for Anaconda. Allow me to emphasize the word "may" in that sentence -- I don’t understand Orex's geological models well enough to say that confidently, but it seems possible based on my preliminary work. Even if that is the case, there it will be important to consider the development costs for Orex's mine and logistical costs associated with processing and shipping the ore to Anaconda's mill. The 2014 PEA from Orex helps give some helpful information in this regard, but I will save that for another article.
The potential for Goldboro to provide higher-grade material for Anaconda's Pine Cove mill fits with Mr. Angelo's comments in our interview that they have a bit "more capacity at the back end of their mill". I don’t know quite how they could use the ore from the Goldboro project in the Pine Cove mill, but I am very intrigued to hear about the potential to optimize existing assets. Particularly as part of the development of a hub and spoke business model!
The Orex documents also mention that the Goldboro deposit has a 'nugget effect' and I am curious to learn more about that. Does the nugget effect create different opportunities for Anaconda to do pre-processing at the Orex site, such as x-ray sorting? The potential for such technical innovations is beyond my understanding, but may provide an opportunity to capture the interest of new investors. Think: “new things in old places”. The Anaconda team has told me a bit about the many research projects they are working on and I am confident they will find a good way forward.
I am keen to learn more about these two companies and what other people in the markets may have to say about the proposed transaction. My first impression is that the two companies are a good fit in terms of the people, properties, politics, and even promotion. Thanks for reading, from Peter Bell.
