TGR: What are a couple of other companies that might be good acquisition targets?
FS: Torex Gold Resources Inc. was an acquisition target over the last few years. With a market cap close to CA $1 billion and a new PEA for its second project called Media Luna in Mexico, which has an after tax net present value of almost US $500M, it might be too big when you consider that a potential buyer would have to pay a substantial premium.
The company is building its first mine, El Limón, right now. It's permitted and financed and adjacent to the Media Luna deposit. Both deposits are world class. Torex is poised to build the mine and go into production on its own.
Three names that still circle around as acquisition targets are Lake Shore Gold, Detour Gold Corp. and Pretium Resources Inc.
TGR: What makes Lake Shore an interesting company as a takeover prospect?
FS: I think it is in the right jurisdiction. It is benefitting from the weak Canadian dollar and has a decent operation, plenty of in-the-ground potential and is fixing its balance sheet over time. Gold in Canadian dollars is almost $1,500/oz right now, so it is protected. It's like a hedge.
TGR: What are the steps Lake Shore still needs to take to derisk it to the point that it would start turning heads?
FS: It was turned around two years ago. It has a relatively long mine life and generates cash flow. Although the valuation discount of the past has largely been removed over the last few quarters, I don't think the market has really factored in an M&A premium. This could change once the company demonstrates its ability to repay its CA $103.5M convertible debenture by operating cash flow in the next two years in order to reduce the balance sheet risk.
TGR: Is Detour in the same position?
FS: In terms of mine life and annual gold production Detour is the only major Canadian deposit that is still in the hands of a single asset producer now that Osisko Mining Corp. is gone. Detour is highly leveraged to the gold price, but it has been volatile. Sometimes it makes money, sometimes it doesn't, based on mining and milling rates. I think there is still some financing risk in a persisting low gold price environment as Detour currently has some CA $500M in outstanding convertible debt.
What Detour really needs is an elevated, high gold price environment. Then it would make sense for an acquirer to buy. Right now, I don't see that. It's just a name circling around.
TGR: Pretium is busy moving the Brucejack deposit ahead in British Columbia. It recently announced new permitting and infill drilling in Valley of the Kings. Are there any key catalysts we should be looking for there?
FS: The great thing about Pretium is the sheer size of the deposit, as well as the grade. It's one of those mines that brings a long mine life and high grade in a safe jurisdiction. Pretium is probably clicking the box there as well, but it's also hard to say if an M&A premium is factored in.
It recently received an Environmental Assessment Decision Statement from the Federal Minister of the Environment that also includes agreement with the Nisga'a Nation treaty. CA $80M in new Chinese money has been invested in the company. Pretium is a third name that I hear regularly in M&A discussions.
TGR: What about companies that might just be good investments right now?
FS: St Andrew Goldfields Ltd. is attractive for me because it is priced right. The company has growth potential and no debt. It's trading at around $0.28/share for a market cap of less than US$100M. The market has not taken note of St Andrew because of the tight shareholder structure. A single shareholder owns around 50% of the company so brokers have not really covered the stock, and it is not very liquid as a result.
But when you look into the company a little bit deeper, it is currently producing around 100,000 ounces (100 Koz) of gold per year in the Timmins mining district on Ontario, Canada, but in Q4/15, it will bring the Taylor mine into production. That could add another 20–30 Koz of high-grade and low-cost production to its portfolio.
TGR: Do you think that is what investors are waiting for?
FS: In the last bulk sample, St Andrew put out a very good results from Taylor demonstrating the grades were 20% higher at almost 9 grams per ton (9 g/t) than its forecast. The stock price didn't really react on the news, but I think that's just a function of the market. There is no interest in the sector.
This is an opportunity because if it can grow production by 25–30%, it doesn't need to dilute shareholders, and it has another high-grade mine, which is open at depth, gives free cash flow and has no major royalty. That is something investors will really have to pay attention to. Taylor is going to change the whole production profile and financial situation of the company.
TGR: What is another company worth watching?
FS: When you look for value, where do you turn? Companies that suffered dramatically in the current downturn, but generate cash flow at current metal prices, have cash in the bank and no debt. I think one of them is Gold Resource Corp. It just put out Q2/15 financials. Despite an illegal mine protest and work stoppage in May, the company earned US$9.4M in operating cash flow and is paying around a 4% dividend yield, which should be sustainable given the strong balance sheet. It has cash in the bank.
It's debt free. It has a nice, high-grade silver-gold project in Mexico and plenty of exploration potential; nevertheless, the stock is down to US$2.50/ share after the company announced a decrease in metal production for the second quarter. I think the selling is overdone. I remember in 2009 it moved from $1 or so to close to US$30/share in 2011 and it wasn't even in commercial production. Now, Gold Resource is in production and the market cap is down to $120M, and it is still paying a dividend. The good news is it didn't dilute all the way down. I think the sentiment there is very negative and consider the stock undervalued.
The same is true for Timmins Gold Corp, which just made two acquisitions in Mexico over the last eight months. I think the market is overly concerned over whether the company has the capability to bring the two gold projects into production in the foreseeable future. But Timmins, with its existing San Francisco mine in Mexico, financed and put this mine into production in the last down cycle in 2008 and 2009, so management has proven it knows how to execute.
The company has US$40M in net working capital and can sequence the development of the two new projects to manage the capital requirements. It is producing around 120 Koz annually. It reduced guidance a little bit, but the underlying asset portfolio has the potential to become a 300 Koz producer. The market cap in U.S. dollars is down to $100M, which I think is ridiculously cheap. Timmins looks very undervalued, in my opinion.
TGR: You also follow Australian companies. What will the precious metals mining landscape look like there once the dust settles on the OceanaGold deal?
FS: I think the Australian producers with West African operations get virtually no attention in this market regardless of the quality of the assets. The Australian dollar is so weak that gold there is at a two- to three-year high. That makes the local producers with mines in Australia look attractive.
One to watch is Perseus Mining Ltd. The market cap is around AU $150M, and it has AU $127M in cash and bullion with no debt. This is an opportunity to buy a producer almost at cash value. Its Edikan gold mine in Ghana is targeting 200 Koz of annual production. It has a 5.4 Moz gold resource. The company added AU$40M cash and bullion in Q2/15. What is really attractive to me is that the resource base is so big. The mine life is eight years. Management has now proven that it has effectively brought costs under control.
In the June quarter the company's all-in site costs are below $700/ounce, so it has a good cash margin. It's a low-grade deposit, 1.2 g/t according to the mine plan and, typically for such deposits, any reduction in mining costs can improve the operating cash flows significantly. At Edikan, there are seven pits to mine over the mine's life, so it's not so easy to work these deposits, but if you're a value investor and you're thinking gold is going to turn around one day, here is a company that trades almost at cash and you get the gold virtually for free.
TGR: Is there one last story that you want to mention?
FS: Probably the last one that also touches on this whole M&A story would be Great Panther Silver Ltd. The stock has suffered lately after some exchange-traded funds sold their positions. But it made two acquisitions over the last few months that are interesting. It bought an option on the Coricancha polymetallic gold-silver-zinc deposit in Peru from Nyrstar.
If it wants to execute its option to buy the whole project, including the infrastructure, mill, everything on site, the price would be around US$18M. It has a 124 Moz silver equivalent Inferred resource and 22 Moz silver equivalent Measured and Indicated resource. So it's a big resource. Great Panther is reviewing the mine plan to see if it can find cost efficiencies. Then it will decide if it wants to execute on the option. I think that's smart. Great Panther is a stock to watch.
TGR: Do you have any final words of wisdom for readers looking to survive 2015?
FS: Every bear market eventually turns into a bull market again. Things are cyclical. So don't get depressed. You can never pick the bottom, but you can prepare for the next upturn. Be patient. Don't get frustrated. The cycle will turn. I think it's probably coming in late 2015 or early 2016. When we see the best teams in the mining industry buying assets, which gives you some confidence that the bottom can't be far away.
TGR: Thank you for taking the time to talk with us, Florian.