GOLD MARKET HEATS UP WITH FIRST HOSTILE BID OF THE YEAR

The gold sector is heating up—the Market saw its first hostile takeover move of 2020 this week.

Colombian gold producer Gran Colombia (GCM-TSX) announced a plan to consolidate two juniors in nearby Guyana—Gold X Mining Corp (GLDX-TSX), which is friendly—and Guyana Goldfields (GUY-TSX) which is hostile. GCM already owns 22% of GLDX and 5% of GUY.

Silvercorp (SVM-TSX) announced a bid for Guyana on April 27 worth 60 cents or 0.119 shares of Silvercorp. Gran Colombia’s bid is 90 cents per share.

If successful, the 3 way merger would have 275,000 oz of annual gold production, a quick path to 500,000 oz and $100 million cash. Gran Colombia and Goldx say it would also create about $200 million in synergies between GUY’s Aurora Mine and GLDX’s 7.3 million ounce Toroparu deposit—which is only 50 km away.

Guyana Goldfields has only said they received the bid. Silvercorp has made no comment so far.

I think it’s a brilliant move by Gold X CEO Paul Matysek. He has made the synergies between Gold X and Guyana so obvious–so even if this proposed merger doesn’t consummate, he has made Silvercorp very aware of how much sense it makes for them to next take out Gold X. It will put Matysek out of a job though.

It makes sense for these two assets to be together. What you have here is a mill without a mine (GUY) and a mine without a mill (GLDX). Toroparu’s ore has similar metallurgy to Aurora, and could feed the Carbon-In-Leach (CIL) plant there.

If Gran Colombia is successful and the two acquisitions close, the new team will move the production timetable forward on its 7.3 million ounce Toroparu asset by ~2 years and get there with far less capital—by trucking their ore to Guyana’s operating Aurora mine some 50 km away.

Source: Gold X Investor Presentation   

Second, the issues with the Aurora Mine have revolved around getting enough high-quality ore to the mill. While the mine has had plenty of problems, there appears to be nothing wrong with the infrastructure.

Guyana spent well over $200 million building out this infrastructure over the last 5 years. Replicating it now would cost even more.

In the December Pre-Economic Assessment for Toroparu, capex was estimated at $360 million. But processing that ore at Aurora means much of that expenditure is not needed. 

Instead, a road will be built to truck ore from Toroparu to Aurora – this will cost around $11 million. There will be an expansion of the mill, and the upfront Toroparu mine development. The total capital required will be far less than a greenfield operation.

Together Toroparu and the Aurora underground can feed the mill. With the pressure off Aurora to “fill the mill”, the focus can be on grade and development. There is a chance that the Aurora mine can more quickly get back on its feet.

Matysek estimates that Toroparu could be producing through the Aurora mill within 12 months.

In a brief interview Monday, Matysek said that combining Toroparu with Aurora was always the obvious choice –at first he just did not know how to do it.

The problem is Gold X simply hasn’t had the balance sheet to cover an acquisition like Guyana. 

That is where Gran Colombia comes in.

Gran Colombia appears to be operating as the piggybank of the transaction. They clearly see the synergies that I described above, they already own 20% of Gold X and 5% of Guyana, and they have the balance sheet to both make the deal happen and bring Toroparu into production.

But this is a hostile takeover – and that is where it really gets interesting.

We have not yet heard from Guyana Goldfields – or Silvercorp (SVM-TSX). 

The bid from Gran Colombia comes on the heels of a bid from Silvercorp two weeks ago. The Gran Colombia bid of 90c for Guyana (based on Friday’s close) came in 50% higher than the Silvercorp bid of 60c per share.

When Silvercorp announced the acquisition of Guyana, it was not clear to me what they planned to do with it.

That makes me wonder whether this bid will put the bug in Silvercorp’s ears. The synergies between Toroparu and Aurora are just so obvious. 

Full Disclosure: I’ve been long GLDX since $1.68 back in April.

The synergies remind me of another big winner I bought on similar news. When Teranga Gold (TGZ-TSX) acquired the Massawa gold project from Barrick (GOLD-NYSE) they were essentially doing the same thing in reverse. Teranga had the mill and was buying a big undeveloped high grade gold deposit.

The Market LOVED that deal—Teranga raised $140 million, and the stock went from $6 – $11.

Gold X has been a winner for me and subscribers so far—up 60% in less than a month before this deal was announced.  

So far, the market sees this deal a little differently. Both Gran Colombia and Gold X saw their stocks fall throughout the day.

On the surface the acquisition looks like a modest premium for Gold X. Gran Colombia (which already holds 22% of Gold X) will acquire the remaining 78% of the company at a share exchange ratio of 0.500. It is a 15% premium on Friday’s close and no premium at all after the hit today.

The only thing for sure right now is that the Market is expecting gold prices to go higher, and management teams are getting their deals done now to take advantage of it.

 

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