Fund manager Adrian Day reviews the Goldcorp-Newmont merger as well as provides updates on a number of resource companies in his portfolio, including some that he sees as good buys.
Goldcorp has been acquired by Newmont Mining Corp. (NEM:NYSE, 33.04). Shareholders voted in favor of the acquisition, though it was disappointing that, notwithstanding all the noise about excessive payouts, when given the opportunity, few shareholders seem to care enough to use their vote.
Goldcorp shareholders receive 0.328 of a share of Newmont (as well as a final 2 cent dividend). As a final insult for Goldcorp shareholders, Newmont paid its shareholders an extra 88 cent bonus before the merger.
Better times ahead?
Though, as Goldcorp shareholders, we did not like the transaction, and do not see any synergies in the combination, now, as shareholders of the merged Newmont we are holding for now. There will be some overhead savings, and more importantly, Newmont may be able to improve performance at GG's underperforming mines. Moreover, two of GG's larger mines, Peñasquito and Éléonore, are turning and should see improved operations going forward in any event. Newmont will divest non-core mines, improving the balance sheet, though this process will take years. Lastly, if the gold price improves and generalist investors return to the gold space, Newmont will be a stock they look to. We are holding for now, though watching progress carefully.
Major miner invests in Midland
Midland Exploration Inc. (MD:TSX.V; 1.29) announced that the world's largest mining company, BHP, has acquired 5% of Midland through a placement at C$1.70 per share, with warrants at $2.05 good for 18 months.
This is a great transaction, getting a well-respected shareholder, at a great price, but keeping dilution to a minimum. The investment comes after Midland's polymetallic discovery at the Mythrill property in James Bay, where drilling is currently underway. BHP did not have access to non-public information in making the investment, so it says nothing about how the drilling is going. The investment will enable Midland to continue exploration at Mythril without bring in a partner and diluting its interest in the project, though this is the likely eventual conclusion. We do not think this investment in shares is the end of the story, and BHP may be interested in a joint venture or other alliance of one or more of Midland's other projects.
The market response was muted, partly because BHP took only 5% of the shares; it is reported the company wanted a larger stake. More importantly, over 3 million shares from a flow-through financing came free-trading at precisely the same time, and participants in that were no doubt a significant part of the 2.1 million shares that traded since the news was announced (unfortunate timing, no doubt, but illustrative of my antipathy to flow-flow shares, where "investors" are often more interested in the tax write-off than the actual company whose shares they bought).
Be that as it may, it means investors still have the opportunity to buy Midland, at only a few pennies more than last week, but with the validation of a major mining company. Initial drilling results from Mythrill are expected in about four weeks. Midland remains a buy ahead of these results.
Much ado about nothing
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE, US$0.55) announced that a lower court in Mexico ruled that the country's minerals title system was unconstitutional; the case involved claims originally held by Almaden. It is but one of multiple lawsuits in a concerted effort by unions, lefties and environmentalists to throw a spanner in the works of the mining industry in Mexico.
The "argument" of the suits is that Mexican law does not require consultation between the government and local groups before an initial title is granted. This is different from any mining permit, where extensive consultation is required. In this case, the claims subject to the lawsuit were granted many years ago to Almaden in full accordance with the law as is; there is no dispute about that. It is also important to note that the lawsuit claims that the government should consult with local people, and is not a commentary on Almaden's extensive local consultation process. Moreover, the mineral claims in the lawsuit were voluntarily cancelled by Almaden in the normal course some years ago, while the current claims covering the Ixtaca deposit were not subject to the lawsuit. So other than a nuisance and potential poor publicity, it is a moot issue for Almaden. The fact that the stock price moved up after the company put out its release suggests the market agrees. Almaden, currently in the final permitting phase for its Ixtaca deposit, remains a buy on weakness for patient investors.
More significant that first appearances
Almaden spin-off Azucar Minerals Ltd. (AMZ:TSX.V; AXDDF:OTXQX, 0.35) hit a hypogene porphyry zone at the Raya Tembrillo target on its El Cobre property. This large zone of alterations with good copper grades is significant for several reasons. Eagerly anticipated drilling at this target last year was disappointing, but this latest result shows it has potential. Also, it is a distinct target from the heavily drilled Norte zone; there has been some criticism that the company has focused too much on this zone, suggesting to some that the size of the overall El Cobre is too small; this puts paid to that. And lastly, it brings the company closer to finding the porphyry center. Geologist and letter writer Eric Coffin put it this way: "this is the first indication that Azucar may have discovered the source mineralization for the supergene zone." The significance of this hole goes beyond the actual grades.
Separately Newcrest, which a year ago invested $19 million for a 19.9% interest in Azucar, exercised its "top-up" rights to maintain it 19.9% interest. Though this was a tiny amount of money (less than C$20,000), the fact that it chose to purchase more shares is a signal that it continues to be interested in the property. Newcrest's initial investment was intended to pay for a two-year drill program, though, given Azucar's low drilling cost, sufficient funds remain for an additional two years plus. Azucar is a buy at this level, again for investors with a long-term view.
Financing, revenue, sale, production and more
Other developments: Lara Exploration Ltd. (LRA:TSX.V, 0.57) closed its $2 million financing; this puts it in a strong position to continue its exploration program at the newly discovered Itaituba Vanadium project in Brazil. It is a buy at the current level.
Altius Minerals Corp. (ALS:TSX.V, 13.14) said it expects record royalty revenue of $21.5 million (50 cents per share) for the quarter ending March 31st, an increase of 36% over the same quarter last year. Increased ownership of the Labrador Iron Ore Royalty Corp., as well as better potash, base metals and iron ore prices all contributed, allowing the company to increase its full-year guidance to $77–$81 million, an increase of around 14% on the previous forecast. Altius remains a core holding; we would wait for a pullback to add more, maybe to the mid-$12 range (though the value remains good at the current price).
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, US$0.61) reported additional positive metallurgical tests from the ore at its Mt. Todd property. Though Vista is significantly undervalued based on its ownership of Mt. Todd, we don't see a rush to buy, and would add on significant weakness.
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE, US$2.23) sold its mostly copper Chapada Mine in Brazil to Lundin Mining. Though Lundin got the better of the deal, the $1 billion cash will enable Yamana to pay down its debt. Given the stock's decline from $2.70 a week ago, it is likely oversold now, and good for a trade (though there could be further weakness to $2.10 or so).
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE, US$3.05) released first-quarter production results from its two existing mines, showing significant declines in gold and silver production, but increases in lead and zinc, with costs are both mines within annual guidance. Fortuna is a strong buy at this level.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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