|By early this year Rye Patch found itself with a very weak share price just as its mine was finally starting to work. Alio Gold saw opportunity and pounced, taking the company out in an all-share deal valued at $1.57 per share.|
The third deal of late saw Gold Fields pay US$183 million in cash to buy 50% of Asanko’s namesake gold mine in Ghana as well as 10% of Asanko itself. On the surface it looks like a heady deal, given the amount of cash involved. On closer inspection, though, it was another major taking advantage of a cash-strapped junior.
Asanko reached commercial production at the start of 2017, after permitting a large mine churning through 5 million tonnes of ore annually from as much as 11 deposits. The company started smaller than that, tapping into three deposits to produce roughly 200,000 oz. gold a year.
The mine is operating, but with some key challenges. First, the company used a US$165-million loan to build the mine, which was coming due. And construction cost creep meant that a significant amount of stripping had been deferred in 2017, adding as much as US$70 million in costs for 2018.
Second, the vision involved expanding the mine, at an additional cost of at some $150 million over the next two years. That vision was going nowhere fast: the company was very indebted and the mine is yet to make money.
There is absolutely value in a permitted and constructed gold mine with clear expansion opportunity. Asanko is exactly that, and a fairly large mine at that. Yes, all-in costs are high and it has yet to generate any free cash flow, but costs should come down over time. And the greater Asanko project offers a lot of gold for a company willing and able to front the development capital.
Gold Fields is that company, or at least saw enough opportunity in Asanko to pay off the company’s debt in exchange for 50% of the mine. It was Gold Fields seizing the opportunity to buy proven production in a growing operation, which is a much safer way to add annual ounces than building a new mine.
Looking back at these three deals, I basically see opportunism. I actually dislike that word, as it has developed a negative association, as though a company shouldn’t take advantage of another company’s financial distress. But of course they should! That’s Mergers & Acquisitions 101.
The fact that deals today seemed mostly to be spurred by specific corporate situations means the market is still young. We aren’t seeing proactive deals focused on growth, such as majors buying development-stage projects they want to build themselves.
Deals are good, but the deal climate can best be described as tepid. It ain’t freezing cold the way it used to be, but it’s going to take a lot – higher metal prices, stronger investor interest in the sector, and some competition among acquirers for good assets – before deal making really heats up.