Spring air brings a whiff of takeover fever to the junior gold sector
This week’s bid for gold mining hopeful Explaurum has stoked speculation about which explorers could be targeted next as producers look to capitalise on their strong cash generating capacity. Plus, analysts warm to Venturex as Northern Star lends a hand and Kairos shows nuggets are news again in the Pilbara.
Folks are wondering if Ramelius’ (RMS) switch to Pac-Man mode this week signals the start of a wave of merger and acquisition activity in the junior gold space.
In the space of a couple of days, the $240 million Ramelius has launched a hostile $54 million scrip bid for Explaurum (EXU) and has secured an agreement to acquire the Marda gold project from its owner’s liquidator for $13m.
It would be nice to think that Ramelius is leading the way in a consolidation of the junior gold space. But the pitch with both acquisitions – Explaurum is far from certain – is that they are all about providing truckable feed for its Edna May gold operation.
Explaurum and Marda come with resource bases of 675,000oz and 333,000oz respectively. Both have lesser reserves grading all of 2g/t gold yet the ores would have to be trucked 150km and 190km respectively.
So it seems a bit of a stretch to think the twin moves are all about feeding Edna May. Just as likely a motivation is that Ramelius is simply after another growth story, with Explaurum in particular capable of achieving stand-alone status as well as delivering exploration upside in WA’s under-explored wheatbelt region.
Whatever the motivation, there are plenty of other juniors in a similar boat to Explaurum in that they currently have a sub-1Moz resource – or bigger in some cases - which could grow with more exploration to underpin standalone developments.
Or they could be snapped up by producers like Ramelius. The producers continue to enjoy fat margins on their gold production which delivers them loads of cash and share prices that give them firepower in either cash or scrip bids for the stranded juniors with their undervalued ounces.
Never buy a stock in anticipation of a takeover bid. But remembering the spurned Ramelius bid for Explaurum was at a 66% premium to the bid price, it cannot hurt to wonder who might be next if the buy-cheap-ounces-with-exploration-upside thematic takes hold.
Some names that come to mind include Ausgold, Bellevue, Breaker, Capricorn, Echo, Genesis Minerals, Kin and Bellevue.
For longer than is worth remembering, the market pretty much ignored Venturex (VRX) and its development ambitions for the Sulphur Springs zinc-copper project in the Pilbara.
It didn’t matter what the base metals markets were doing, or what the company was saying, the share price could not break out of its coma-like state.
Things have changed, as was reflected in yesterday’s 1c, or 6.25%, bounce to 17c (there has been a 1-for-15 share consolidation). It reflected two things.
First, there was the overnight recovery in base metals, so Venturex is now being seen as a way to play metal price moves, which is a big change for the stock.
More critically though was Wednesday’s news that its 19% shareholder Northern Star (NST) had taken time out from its $350m acquisition of the Pogo gold mine in Alaska to sign-off on a $2m loan which Venturex will use to complete its definitive feasibility study in to the Sulphur Springs development.
Repayable in cash or shares at NST’s election, the loan means Venturex can avoid a dilutive equity raising ahead of the release of the DFS, something most in the market are assuming will be a re-rating event.
Adding to the sense of momentum about Sulphur Springs after all these years has been the positive research notes that have been floating around after a recent field trip by analysts.
Canaccord’s Tim McCormack was one of those to visit. In a note released this week, he put a 50c price target on the stock.
“The site visit highlighted a development-ready project and while it has been decades since the initial discovery, we expect the pending DFS (due late SepQ'18) to articulate a sensible development plan, which balances open pit and underground mining at a scale that offers robust financial metrics at conservative metal prices,” McCormack said.
He estimates total capex for the project (including nine months pre-strip/capitalised mining) to be $160m and forecasts production of 34,000tpa zinc and 15,000tpa of copper over an initial mine life of seven years, with first production possible in the second half of FY 2020.
Those are meaningful numbers for a company with Venturex’s current market cap, which goes to why McCormack has the 50c price target on the stock.
“Venturex has recently appointed a debt advisor and with completion of the DFS imminent, we expect discussions with finance providers to accelerate in the DecQ'18,’’ McCormack said.
Investors who backed home the idea that the Pilbara gold conglomerate story had legs to it are down by close to $1 billion.
Painful stuff, particularly for backers of Canada’s Novo Resources, the group that led the charge this time last year when its market cap ballooned to $C1.4 billion.
Novo is now back at $C560 million and accounts for most of the $1bn loss in value across the conglomerate space, which originally got fired up on the metal detector recovery of melon-sized gold nuggets and Witwatersrand comparisons.
Just so we don’t all forget, it is worth repeating the comment by Novo chairman Quinton Hennigh at Diggers & Dealers in early August.
“We’re exploring, we’re learning a lot and I would say within the next six months we’ll be able to talk about other very, very interesting things,” Hennigh said.
So he has until early February to convince the doubters.
Still, Novo is not alone in believing the conglomerates story will turn out to be something special. A bunch of ASX-listed juniors have stayed loyal to the cause.
One of those is Kairos (KAI) which has prioritised conglomerate exploration over its conventional WA gold exploration interests. It’s just been rewarded too, with the discovery of a rich nugget patch at its Croydon project in the Pilbara.
In all, 256 nuggets with a combined weight of 8.2oz were recovered. The nuggets won’t exactly cover the cost of the helicopter-supported field campaign. But given the prospective horizon extends for 5km to the north, there are good reasons why follow up work is now a priority for Kairos.
Trenching and later RC/diamond drilling is planned to establish the overall dimensions of the prospective conglomerate horizon.
Given its relatively light market cap of $27m is covered by its conventional 640,000oz resource at its Mt York project in the Pilbara, the upcoming program could be worth watching. The market certainly thinks so as yesterday it pushed Kairos 6% higher to 3.4c on the strength of Croydon nugget find.
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One of Australia’s leading business journalists, Barry FitzGerald, highlights the issues, opportunities and challenges for small and mid-cap resources stocks, and most recently penned his column for The Australian newspaper.