by John Rubino, Dollar Collapse:
Commodities analyst Marin Katusa makes a compelling case that regardless of what gold does in the near term, some miners are likely to be bought out at nice premiums to current prices. Here are two of them:
The gold market is in a funk. And if you have an internet connection, you don’t need me to remind you.
Managed money short positions continue to hit record bearish positions in the weekly commitment of trader’s reports. Below is a chart showing the current short position for non-commercial short speculators.
Investor sentiment is very low. According to data from SentimentTrader published last month… “Optimism on gold, silver, and platinum now ranks among the lowest in 27 years.”
Small exploration companies are looking to cash up on any market momentum.
And tax loss season this year could be the most brutal since 2012.
So with all this negativity why am I excited? Two-fold.
One – The NYSE Arca Gold Mine Index rose by double digits – 8 of 9 times – in the 3 months following extreme pessimism in gold market sentiment like we’re seeing today.
And two – Because there could be plenty of incredible companies and assets for sale for dimes on the dollar. And that always has my attention.
So in this week’s edition of Katusa’s Investment Insights, we will detail two companies that could make headlines with any merger or acquisition activity.
Is Detour Gold too Cheap to Ignore?
Detour Gold (DGC.TO) is a Canadian company that owns the Detour Gold Mine. It is one of the largest producing gold mines in Canada and the company’s sole asset.
The company’s share price has been under siege, dropping from CAD$20 per share to CAD$11 per share in the span of 18 months.
Its major institutional investors, Paulson & Co and Van Eck, are throwing in the towel. The pair of institutions is pushing for either a change of company directors or the exploration of a sale to a major gold producer.
They went as far as to say:
“May we remind you that this company does not belong to you, but rather to us, the shareholders”
(Side note: I’ve used that line many times over the past 3 months when talking to different company management teams and board members).
This year, Detour Gold released an updated life of mine schedule with higher than expected production costs. Based on these production figures and gold at $1,250 per ounce, the Net Present Value of free cash flow is around CAD$3 billion. Currently, the company has an enterprise value of CAD$2.1 billion, which means Detour is trading at a 30 percent discount.
However, with gold weak and struggling to get above $1,200 per ounce, Detour has a lot of room to drop. And it could be a great candidate to watch for during the upcoming tax loss season.
The Detour Gold Mine is slated to produce upwards of 600,000 ounces of gold annually for 18 years.
The Achilles heel of the mine is that the production ore grade will average 0.97 grams per tonne over the life of the mine. At the same time, cash costs will be $843 per ounce. This heavily ties the value of the project to the price of gold.
It makes it a great mine to own in a strong gold market, and a disaster to own in a weak one. And right now, things are shaky in the gold market. Volume is low, sentiment is low and the gold price is struggling.
That said Detour Gold has been and will continue to be on the radar of all major gold producers.
So who’s interested?
The suitor list for a company like Detour is quite small.
Companies like Newmont or Goldcorp are always going to be in the mix for world-class assets.
Agnico Eagle and Yamana could do another 50-50 joint acquisition, like when the pair acquired Osisko for $3.9 billion in 2014.
I do not see Barrick or Kinross getting involved, given the state of their balance sheets. Barrick has been hammered by the markets for bad acquisitions. And shareholders would be very nervous about a big high-cost producer like Detour.
Barrick wants big assets like Detour, but I’m just not sure the big institutions will support Barrick management on such a tough project at the current gold price.
An interesting idea would be if Agnico Eagle and Yamana put together a joint bid for Detour.
If they were successful in buying Detour Gold, Agnico and Yamana could then spin out Osisko and Detour into its own new company.
With a pair of free cash flow generating assets, the spinco (spinout company) could be a solid dividend payer that Agnico and Yamana could be major shareholders in.
That would unlock considerable value for both companies. It would be a very creative deal. And it’s something I would not bet against.
Bonanza Gold: Pretium Resources and the Valley of Kings
Pretium Resources (PVG.TO) has long been one of the market darlings of the sector.
The flagship asset for Pretium Resources is an asset called Brucejack, which is located in British Columbia, Canada.
Since the 1960s, the project has been a focus of exploration by numerous companies. Brucejack is famous for its bonanza grade gold. In 2009, Pretium discovered the Valley of the Kings zone. One of the first drill holes hit 1.5 meters of nearly 17,000 grams of gold per tonne. That’s a massive hit.
Pretium has delineated one of the highest-grade gold projects anywhere in the world. Today, Brucejack hosts 8.7 million ounces of proven and probable gold reserves at an average grade of 14.66 grams per tonne.
It’s a monster.