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Barry FitzGerald writes his legendary Garimpeiro resources column weekly for Stockhead

The friendly $US6.5 billion scrip-bid by Canada’s Barrick for the African gold specialist Randgold will create the world’s biggest gold producer with annual production of more than 6.5 million ounces and a combined market value of $US19.5bn.

The bid was announced earlier in the week and signalled in a big way that merger and acquisition (M&A) activity in the gold space – absent for the last seven years because earlier industry deals were value destructive – has returned with a bang.

The important rider this time around though is that the Barrick acquisition – the management team from the smaller Randgold is actually assuming management control – is unlike the past disasters because the bid is an agreed nil-premium offer.

While more M&A at the big of the end of the industry can be expected to be played out that way — Melbourne’s Newcrest (ASX:NCM) will be feeling twitchy — the good news for investors in junior stocks is that the big takeover premium is alive and well.

Recent M&A action in ASX-listed juniors shows that big premiums are the order of the day when a bigger company goes hunting for some growth by moving to acquire its smaller prey — whether the bid is an agreed one or not.

Three takeovers of note

This month alone there have been three takeover bids of note among the juniors.

First up there was the hostile September 10 bid by gold producer Ramelius (ASX:RMS) for the WA gold developer Explaurum (ASX:EXU).

The contested scrip offer valued Explaurum at an initial 66 per cent premium to its pre-bid price of 7.4c a share.

Explaurum has since moved to 12c to be just under the implied 12.1c value of the bid on Wednesday, indicating that investors do not hold out much hope for an increased offer.

The move by Ramelius was followed up earlier this week by an attempted friendly scrip bid by gold producer Regis Resources (ASX:RRL) for Pilbara gold developer Capricorn Metals (CMM) at a 93 per cent premium, and a friendly scrip bid by Canadian producer Great Panther for ASX-listed Brazilian gold producer Beadell (ASX:BDR) at an implied 51 per cent premium.

In the case of Capricorn, Regis needs to win over the support of the 19 per cent shareholder, the London-based private equity group Hawke’s Point. Talks with the reluctant shareholder are underway in an attempt to win it over but there is no guarantee of success.

What’s going on

The M&A activity in the sector – and the premiums they involve – reflect a number of things.

Most notably, they are all scrip offers.

That suggests that while the share prices of the bidders have all taken a hit of late in line with the weaker gold market, they see value in using their “paper’’ to acquire discounted ounces-in-the-ground held by the juniors.

The ounces are discounted because as is the case with Explaurum and Capricorn, there is a funding challenge to convert their reserves/resources into production.

In Beadell’s case, the discount reflects issues at its Brazilian operations which are only starting to be overcome.

Investing in juniors on the basis that they could be the subject of a takeover bid is a highly risky strategy.

Who’s next?

Still, there is a bunch of juniors that for one reason or another are considered likely takeover candidates, with the potential for a big premium to ruling market prices required to effect the change in control.

The reasons could include ownership of a sizeable resource sitting within easy trucking distance of a would-be predator’s existing treatment plant (Explaurum), the junior’s ownership of an undeveloped resource which requires capital to develop (Capricorn), or a junior which remains undervalued because it has been busy sorting out some mining issues (Beadell).

There are other reasons as well. Garimpeiro has asked around about who might be next in the junior space to have a bigger company come knocking.

Again, investing to profit from the potential for takeover action is fraught with dangers. But if a bid does arrive, it can be very rewarding.

Stocks mentioned in our polling included, in alphabetical order only, the following:

— Ausgold (ASX:AUC) — 2.2c
— Bellevue (ASX:BGL) — 19.5c
— Breaker (ASX:BRB) — 32c
— Echo (ASX:EAR) — 14.5c
— Genesis Minerals (ASX:GMD) — 3.5c

Stocks that could be added to that list include the three West African gold developers mentioned by Garimpeiro on September 20:

— West African Resources (ASX:WAF) — 28.5c
— Cardinal (ASX:CDV) — 45.5c; and a little thing called
— Golden Rim (ASX:GMR) — 2.1c

 

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.