Seeking Less Risky Business In Mining M&A [New Gold Inc. (USA), Newmont Mining Corp, Barrick Gold Corporation (USA)]

TGR: What are some likely takeover targets?

FS: At current valuations, Alacer Gold Corp. (ASR:TSX: AQG:ASX) has a depressed multiple. The company is a low-cost producer with solid margins. In Q3/14 the company produced 63,356 oz at all-in costs of $763/oz at its 80%-owned Çöpler mine in Turkey. What could attract the company to any acquirer is the sulfide portion of the mine that has yet to be built. The sulfide project has a preproduction capital expenditure (capex) of $633 million ($633M) but has a 17-year mine life with all-in costs of $810/oz. That is the kind of project companies are looking for—relatively low capital costs leading to a low-cost, long-life operation. On top of that, Alacer has about $350M cash and no debt. An acquirer could use that cash to build the mine.

TGR: Are companies with polymetallic assets more likely to be targets?

FS: Probably not in the current environment because base metals and iron prices are all down. The trend is down and that is likely to continue. If you are positive on base metals, the dance would be different. But selling those kinds of assets in this market is rather tricky.

TGR: Other targets?

FS: Another one is Amara Mining Plc (AMA:LSE). It has a 5 million ounce (5 Moz) resource called Yaoure in Ivory Coast, West Africa. It’s a junior company but with the right ingredients—a solid resource with decent gold grades, a long mine life and low production costs. The projected all-in costs are $624/oz. There are few projects of this kind that can withstand a $1,000 gold price and in this kind of economy Amara is clearly a takeout candidate.

TGR: Amara used to be known as Cluff Gold Plc. What did you make of the recent Yaoure drill results?

FS: The company continues to demonstrate that the project is growing and that the high-grade mineralization has continuity. It will enter the feasibility stage later next year. It’s all about derisking the project. At its current market cap ($70M), Amara cannot raise the $500–600M necessary to build this mine.

TGR: Any others?

FS: We discussed Romarco Minerals Inc. (R:TSX) in the last interview. It received a mine-operating permit, and the debt terms for $200M in project finance are in place. The grade is OK. It’s in South Carolina, which is fine. Do we see a strategic partner buying into Romarco or Romarco being taken out? Both are possibilities. The project is derisked to a level where it should become an M&A target.

TGR: Romarco just got a loan for $200M but it needs another $120M to build the mine. Where is that going to come from?

FS: That is still subject to equity financing, which is probably holding back the stock because there was a negative reaction when it published the permitting news. Everybody knows an equity deal is coming. So, from an acquirer’s standpoint, is it the optimum time to buy? Probably. It’s either that or Romarco goes the route of self-financing. But at $0.50 or $0.60 per share it would be quite dilutive.

TGR: When the permitting news reached the market, casual observers like myself thought the price would bump up but the opposite happened. Please explain that further.

FS: If people want to sell in this market, they sell on good news when there is liquidity in the stock. It’s puzzling for the average investor, but that is how the market is right now. It provides opportunities if you can buy on the dips because you still get a high-quality asset in a safe jurisdiction, trading at $0.55/share.

TGR: Are there other likely takeover targets?

FS: There is another AIM-listed company called Condor Gold Plc (CNR:LSE). It just released a prefeasibility study (PFS) and updated preliminary economic assessment (PEA) for its La India project in Nicaragua. It has 2.33 Moz at 3.9 grams per ton (3.9 g/t), and that includes 1.14 Moz at 3.1 g/t in an open pit, which is very high these days. Management has skin in the game and holds 9% of the company and it is leanly managed.

With the recent financing, the International Financial Corp. (IFC) entered the picture as a strategic partner. That’s a commitment that should help to further reduce political risk. In its PFS, Condor looks at a 0.8 million tons per year (0.8 Mtpa) open-pit mine with an annual production of 79,300 oz gold over seven years considering a front load capex of $110M and all-in sustaining costs of $690/oz. Then in the updated PEA there are two options to build La India. One is to include additional feeder pits for a 1.2 Mtpa plant with a capital requirement of $127M and an annual production of 96,800 oz over a 8-year mine life at similar all-in costs. The other option would include the underground resource, a $170M capex and an annual production of 137,000 oz over a 12-year mine life.

Is it going to be a higher capital cost, higher-production scenario or a lower-capital cost, lower-production scenario? The company wants to be viewed as positively as possible. It is basically saying, “This project has all kinds of optionality, it has strong financing backed by the IFC and it’s close to infrastructure.” Management gives me the impression that this project is for sale, but not at the current share price.

TGR: Is grade a key theme for you in these takeover deals?

FS: Grade is king at the moment. In the end, you want to own quality companies that can make money at current prices or even if we touch $900/oz gold. Because the market has almost no visibility on where gold prices are heading, everything is concentrated on grade because it protects your margins. Should we move into a higher gold price environment, the best leverage is probably with the current marginal producers. They have no room for error, so their valuations remain extremely depressed. Grade is king, at least for the moment.

TGR: What are some producers that could offset a lower gold price with gains from a weak Canadian or Australian dollar versus the greenback?

FS: I would watch Detour Gold Corp. (DGC:TSX) for two reasons. First, probably 80% of its operating and capital expenses are directly linked to the Canadian dollar. So you benefit from a weaker Canadian dollar. Second is leverage to the oil price in the form of lower diesel costs. Oil is down 20% YTD and you can take advantage by investing in big-scale, open-pit, high-tonnage, low-grade operations because those mines are energy and diesel sensitive. You essentially get a “double whammy” with the lower oil prices and the lower Canadian dollar.

TGR: Will takeover rumors resume on that name in 2015?

FS: Detour is still fine-tuning its operations. The company is not cash flow positive at current prices. But it should be in 2015, assuming gold prices stay where they are or move higher and tonnage increases. If that happens and you’re looking for a world-class project in a safe jurisdiction, then Detour should be on the list.

TGR: Any other producers that fit that bill?

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