May Daze: Money-making Mergers in the Gold Space

After months of subdued merger and acquisition (M&A) activity in the gold sector, May is proving to be the month of M&A, with three deals reported this week.

The period started with the announcement that Gran Colombia Gold (TSX:GCM,OTCQX:TPRFF), Gold X Mining (TSXV:GLDX,OTCQX:SSPXF) and Guyana Goldfields (TSX:GUY,OTC Pink:GUYFF) plan to merge to create an intermediate gold producer focused on Latin America.

Also on Monday (May 11), news broke that SSR Mining (TSX:SSRM,NASDAQ:SSRM) and Alacer Gold (TSX:ASR,ASX:ASR) intend to combine under the SSR Mining moniker.

In a third sector deal, Adriatic Metals (ASX:ADT,LSE:ADT1) announced its aim to purchase Tethyan Resource (TSXV:TETH) to establish a polymetallic developer and explorer based in the Balkans.

The proposed transactions come at a time when gold company activity has been somewhat subdued due to coronavirus-related restrictions. With that in mind, the Investing News Network (INN) reached out to several gold experts to find out what the three deals mean for each company as well as the entire sector.

Experts weigh in on latest round of gold M&A

Starting with the “three G” deal between Gran Colombia, Gold X and Guyana Goldfields, Joe Mazumdar of Exploration Insights noted that it should not have come as a big surprise to those who have been tracking Gran Colombia.

“It appears Gran Colombia is looking for a lot of ounces and an operation it can improve upon,” he said.

He pointed out that the amalgamation will bring together the large-volume, low-grade Toroparu open-pit gold project and Aurora, a “problematic open-pit/underground asset.”

“Gran Colombia already had a 21 percent stake in Gold X and a board seat, therefore the acquisition should not be a complete surprise to the market. Gold X has the large (7 million ounces) and low-grade (<1 gram per tonne gold) Toroparu deposit, which provides leverage to the gold price,” said Mazumdar.

“Its previous feasibility study (2014) does not include its updated resource, therefore another feasibility study is planned for 2020,” he continued.

Staking its claim as a leading intermediate producer will be the primary outcome of the deal; however, as Derek Macpherson of Red Cloud stated, it is important to note that both deals involving Gran Colombia are contingent on the other being finalized.

“We view the Gold X/Guyana Goldfields with Gran Colombia potential merger as Gran Colombia using its balance sheet and scale to unlock significant development synergies between Gold X and Guyana Goldfields’ respective deposits,” he said.

In general, Gerardo Del Real of the Outsider Club sees the three-way deal boding well for the sector as it enters a period of sustained growth.

“I think the acquisition shows a desire for liquidity and visibility in anticipation of what many believe — including myself — is the beginning of a historic bull market in the gold space,” he said.

Del Real also sees these same motivators as catalysts behind the SSR Mining and Alacer merger.

“I believe liquidity and visibility to attract larger pools of capital was the motivator, but it also showed a willingness to take on jurisdiction risk in order to accomplish that,” he said.

During a joint conference call on Monday, the CEOs of SSR Mining and Alacer highlighted the goals of the combined entity, including the production of 780,000 gold equivalent ounces over the next three years at an average all-in sustaining cost of US$900 an ounce.

Once united with Alacer, SSR Mining will hold a portfolio of projects in Canada, the US, Argentina and Turkey, and will have a combined equity value of US$4 billion.

“Obviously when you see the words ‘billion-dollar deal’ and ‘Turkey,’ you take note,” said Del Real when asked about potential territorial issues with the deal.

“Jurisdictional risk is like real estate — very localized with different risk parameters that not only depend on the region and community, but on how operators have conducted themselves in those areas.”

Regardless, Del Real was adamant that the deal making and renewed focus on gold developers and explorers is both exciting and timely due to the decreasing number of feasible projects.

“This bodes well for current explorers and developers that can demonstrate gold projects with scale, healthy margins and an attractive production profile in a safe jurisdiction. The bottom line is there are fewer and fewer deposits like that around the world, and those become more valuable by the day,” the editor at the Outsider Club added.

For Explorations Insights’ Mazumdar, of the three deals the market saw this week, the SSR Mining announcement is the most noteworthy due to the size of the company it will create, the fact that it was conducted solely with shares and the additional M&A potential it brings to the table.

“I think the most important transaction was the SSR Mining and Alacer Gold combination, which was the largest (US$4 billion) and creates a new mid-tier producer that has the potential to generate significant free cash flow and already has a strong balance sheet,” he said.

Junior Stock Review’s Brian Leni found Adriatic Metals’ proposed acquisition of Tethyan the most intriguing piece of M&A news this week.

“Personally, I find the (deal) more interesting, as I can remember talking to the Tethyan Resource management team at PDAC two years ago and thought it sounded like an interesting base metals exploration story,” said Leni.

While Leni said he hasn’t followed either of the two companies closely in the years since, he was very surprised to see their share prices fall over the last eight to 12 months.

After reaching an all-time high of C$0.82 in April 2019, shares of Tethyan fell as low as C$0.65 at the end of March this year.

“However, I will say that with Tethyan’s share price a fraction of what it was over a year ago, it appears at face value to be a great opportunistic acquisition by Adriatic Metals,” added Leni.

Other points worth noting on gold M&A

With the increased attention gold juniors are now getting, the experts INN spoke to noted that there are things investors should keep in mind when pursuing these or other investments in the space.

“Diversification for a single-asset junior mining company helps mitigate jurisdictional risk, which may be what Alacer Gold suffered from in Turkey or even Adriatic Metals in Bosnia,” explained Mazumdar. “One of the ways to avert this is by an M&A transaction and/or issuing dividends. Gran Colombia’s exposure is primarily skewed to Colombia, and it has been looking to diversify for several years.”

For Leni, it goes back to the Adriatic/Tethyan deal and what catalysts set it in motion.

“My concern with the deal would be why Tethyan’s share price fell in the first place,” he explained to INN. “Answering that question would give investors a better perspective on whether it was a valued-added acquisition by Adriatic.”

Del Real offered insight into some other companies that may offer value opportunities for investors looking to stake a claim in this early gold bull market.

“We are finally at a point where discoveries and success with the drill bit are getting the recognition they deserve. Even smaller companies are starting to see quality exploration rewarded by capital infusions that were nearly impossible just a year ago,” he said.

“Mawson Resources (TSX:MAW) is a recent example. It’s up over 80 percent over the past month or so, and despite that it has attracted C$18 million to fund upcoming development on its two exceptional exploration projects.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.