Bold Little Deals
A merger here, an acquisition there. A financing, a new listing.
Gold prices may be trembling and swaths of companies flirting with their 52-week lows, but deals continue to get done.
More deals will surface in the coming weeks. Individually, none seem very exciting.
Collectively, they show a sector using today's opportunities to prepare for tomorrow.
"There have been a couple deals – nothing super exciting, but it's cleaning things up," my broker said yesterday. "And things have to get cleaned up before they can get better."
Lots of mining messes have already been tidied. Producers have cut costs and trimmed debts. Explorers to miners have reduced overheads and rationalized priorities, even when that required writing down huge (but now impossible) acquisitions.
The heady days of high-cost growth are gone. It was a long and painful process, but today's pared-down survivors are focused on future opportunity rather than fixing past mistakes.
"Now that most of the cost cutting has been done, miners must move ahead and focus on the next stage of growth," says PriceWaterhouseCoopers Global Mining Leader John Gravelle, in the firm's annual mining survey. "It will continue to be a delicate balance of risk and reward: companies don't want to make mistakes, which means there's a strong tendency to err on the side of caution. Still, bold moves are needed to propel the industry forward."
Gravelle is right…though at the bottom companies have to be bold just to get through the day.
The VP exploration of a well-funded junior with a great project and drill results pending told me last week that he doesn't want to release results into "this market unless we absolutely have to", because investors take any news as a chance to ditch shares and run.
Rick Rule calls that capitulation – when most participants in the market give up completely and simultaneously. It's volatile and dramatic, but Rule notes that capitulation events usually mark the end of long bear markets.
"Markets turn from bad to good as a consequence of markets outperforming expectations, and capitulation dooms expectation," Rule said in a recent interview Sprott Global's Tekoa Da Silva. "At the end of a capitulation period the only outlook for the market is bad, and as a consequence (and by definition) it's almost impossible for the market not to outperform. That's been the case of every prior capitulation I've experienced."
Rule goes on to describe the other reason capitulations are useful: junior mining companies finally lose hope of raising money in a better market, so they finance despite low share prices and get back to exploring.
"You cannot save your way to prosperity in this business; you can only make money by investing money in exploration and development," Rule said. "For 18 months the issuers have played chicken with the market, waiting to raise more money until share prices theoretically go higher, and as a consequence generated no value that would cause their share prices to go higher. The hallmark of the 2000 capitulation, as an example, was to bring the very best issuers (the Robert Friedlands, Ross Beatys, Bob Quartermains and Lukas Lundins) back to market to say, 'Let's go, let's raise money, let's build.'"
And that is why each little deal done today is so significant.
Take New Gold's (TSX: NGD) acquisition of Bayfield Ventures (TSXV: BYV), in an all-share deal valuing Bayfield at $16.6 million. Bayfield's raison d'etre has always been to get taken out by the owner of the Rainy River project, as Bayfield's three properties wind around and through the Rainy River land package.
The New Gold offer achieves that goal but many BYV shareholders are unimpressed with a deal that pegs BYV shares at 21¢. In 2010 and 2011 Bayfield shares averaged three times that and peaked at $1.35. To boot, New Gold got the Rainy River project by acquiring Rainy River Resources for far more - $310 million – just last year.
Bullboard commentators called the Bayfield deal "asinine" and decried New Gold as "opportunistic and predatory".
I understand that out-of-the-money Bayfield investors are upset. I am not one of them, which lets me see the bigger picture. And that picture shows New Gold making a well-timed move and Bayfield management knowing better than to say no.
More generally, it shows a sector consolidating, cleaning up, and preparing for the next rally.
The merger of US Gold & Silver (TSX: USA) with Scorpio Mining (TSX: SPM) is similar. These silver miners have seen their share prices slide almost 90% since 2012, making this a dime-on-the-dollar deal for both. Moreover, the deal is happening even though Scorpio has not yet been able to deal with a property boundary issue that will likely reduce the resource count at its El Cajon mine by almost half.
However, US Gold & Silver understands that preparing for the future is more important than searching for the 'perfect' deal.
There is no perfect deal. Instead, there are good deals, proactive deals, deals that focus on synergy and cost savings and economies of scale, and deals that free up good management teams to pursue new opportunities.
Agnico Eagle's (TSX: AEM) deal for Cayden Resources (TSXV: CYD) fit those bills. It was a proactive deal that added promising, synergistic projects to Agnico's portfolio. And it freed up a great management team to look for new opportunities.
And looking they are. The Cayden group, headed by Ivan Bebek, is very much on the hunt for a new project or company to acquire at bottom-of-the-market prices.
They have competition. The folks who put junior resource companies together are scrambling to secure deals. I hear daily about potential project deals, competitive bids on particularly promising packages, and geologists traveling the world doing diligence on projects.
Going back to my broker: "These guys are out looking – like, really looking, every day – for new projects. I think it's a few select groups like this that will create the outstanding opportunities. It might still take a few years for the whole sector to return, but select stocks will outperform like mad and they'll come from groups like that."
I have some ideas of who to watch.
One example: did you know Guerrero Ventures (TSXV: GV) snagged Seigfried Weidner as its vice-president of exploration? Seig is an incredible geologist, with a list of major discoveries to his name. If he likes Guerrero's Biricu project – and I've talked with him and he really does – then Biricu has some real potential.
Another: did you notice the debut of CopperBank Resources (CSE: CBK) a few days ago? CopperBank is the product of a well-connected team of mining entrepreneurs and investors aiming to emulate Ross Beaty's Lumina Copper model: assemble a portfolio of early-stage copper projects at the market bottoms, advance them under one low-cost roof, and then spin them out or sell them when the markets are back in action.
Those are two investment ideas I'm currently contemplating. They are among a list of stock symbols beside my keyboard, all contenders for the ten spots in my upcoming Turning Point: Bottom Fishing special report.
The most successful investors are contrarians. To be contrarian you have to act when everyone else is scared. You have to take advantage of the capitulation.
And you have to have faith that a steady stream of bold little deals lays the foundation for select stocks to make it big.
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