A RARE HOSTILE TAKEOVER IN CANADA GOLD ROYALTIES GROY-NYSE VS ELEMENTAL ROYALTIES—ELE-TSXv

Gold Royalty (GROY-NYSE) has been on an M&A tear, buying up several small illiquid gold royalty plays on the exchange. 

Now they have made a HOSTILE bid for ELE. Hostile bids are very rare.

The GROY team is my newsletter colleague Marin Katusa, Amir Adnani and David Garofolo (ex CEO of Goldcorp when it was bought by Newmont) who put together GROY-NYSE as a blind pool ($90 million!!) to go out and consolidate this group, and they have done a very good job. Marin is a financial genius, and Garofolo has the operating background to make this all work.

But like ELE, the GROY stock has done very little in a Market where no one cares about gold, and especially doesn’t care about junior gold stocks of any kind. The charts of both stocks are quite flat and boring.

GROY have now offered to buy ELE at $1.75 a share in an all-share transaction. They (oddly) broadcast this intention publicly before making an official offer.

For GROY this is a no brainer. They have a market cap of roughly 100x revenue ($7 million, and ELE is trading at 10X ($11 million). YES, ELE actually has more revenue!!

ELE would be their crown jewel. Elemental’s big royalty kicks in NOW—ELE’s first big cheque from that royalty comes in January. So it’s a perfect time for GROY to make this opportunistic bid.

The GROY team is not stupid. They know that 10 shareholders make up 70% of the ELE stock. 

Chairman John Robins just sold another of his companies, Great Bear (GBR-TSXv) to Kinross (KGC-NYSE/K-TSX) for US$1.4 billion. Many GBR shareholders are also ELE shareholders. So nobody needs any money.

With such a tight shareholder group, the GROY team must have had some behind-the-scenes chats with independent shareholders or a few of these key shareholders before making a bid–or why would they bother? Otherwise, all this is is FREE PUBLICITY for Elemental Royalties, broadcasting to the world that this is a great company trading incredibly cheap.

So somebody in that tight group must have encouraged GROY. Now, one of them is Aussie-listed South32 (ASX:S32) which was spun out of Aussie mining giant BHP back in 2015.

They sold their producing royalty to ELE because ELE was small and illiquid (meaning they thought the stock had great upside a few years out).

In fact, Robins has his own royalty company–Great Bear Royalty (GBRR-TSXV). That stock has gone up with the Kinross (K-TSX/KGC-NYSE) takeover of Great Bear at CAD$29/share.

Great Bear has a large high grade deposit in the prolific Red Lake district of northern Ontario. While it is years away from production, it would arguably be a very complementary asset to merge with Elemental–as

Elemental has cash flow royalties from producing assets in Africa and Australia. A development stage asset in North America would add some diversity.

Except ELE wants to buy producing royalties, not development stage assets that are years away from generating cash flow. But Great Bear has a great shot at being a BIG mine–in a first world country. So that option is up in the air.

Of course, if GBRR did make a bid, it would need a fairness opinion and everybody associated with Robins would not be able to vote.

The management team at Elemental Royalties has done everything shareholders could ask—but the Market does not care about junior gold stocks at all, and hasn’t since ELE listed. (Gold is looking better this week though!)

Not only is the stock flat, it barely trades at all–which, as a shareholder myself, I can tell you is really annoying! But ELE’s stock is too tight, and has too much insider control. Up until GROY came along, the Market clearly thought the takeover potential was very limited.

GROY is taking advantage of that.

The mining and mineral exploration industry is VERY small–all these management teams know each other well, and have for a long time. (Katusa and Robins actually have their offices a few floors apart in the same Vancouver office tower–how’s that for an awkward elevator ride????) And the same goes with the funds & large retail shareholders that own these stocks.

So this is a bit personal for everyone involved.

Adnani and Katusa et al specifically set out to give the GROY shareholders the best shot at making Big Money (heads up-I’m a paying subscriber of Marin’s). He brought in Garofolo, and got GROY listed in the US–to better offer liquidity and upside to his shareholders.

That’s exactly what us ELE shareholders want! But to me, ELE is worth a lot more to GROY–with a much higher valuation on lower quality assets–than $1.75. ELE has more revenue than GROY! And their big royalty kicks in this quarter!

Great timing for GROY–and now gold is looking brighter. But I’m fairly certain this bid is just Round 1. Will there be a slightly higher bid with a bit of cash? Or will there be a 2nd bid from another company.

It’s a no-lose situation for me as an ELE shareholder.

I rarely love drama in my investing life. But I’m going to love watching this take-over battle play out.