Barry FitzGerald: How to spot a junior gold takeover target. Or two.

Investing on the basis of takeover speculation can be dicey.

If the speculated takeover does not eventuate, the investor ends up watching the rumoured takeover target sink back to pre-speculation levels.

It is best avoided unless the investor has some real inside dope on a takeover bid. But that would be illegal, wouldn’t it?

Garimpeiro nevertheless thinks there is a time to adopt a strategy of investing in companies where there seems to be a real chance of some takeover action.

He reckons that the time has arrived in the punch-drunk junior gold sector.

The idea is that the takeover speculation itself can act as a backstop to a company’s share price during broad sector weakness like that on full display now.

If a bid does emerge, all the better. And if it doesn’t, the company would simply revert to following the ups and downs of the gold price, remembering that to be a takeover target, a stock needs to be assessed as undervalued in the first instance.

So Garimpeiro went looking for gold juniors on the ASX which are the subject of ongoing takeover speculation.

He has come up with two – the West African gold developer Tietto, and the company that made one of the best gold discoveries in recent times in Western Australia’s Pilbara region, De Grey.

Tietto (ASX:TIE): It was trading at 66.5c mid-week for a market cap of $718 million. The stock has been on the tear of late due to fast-approaching first production from its 3.45 million ounce Abujar project in Cote d’Ivoire, and the recent emergence of two Chinese groups as substantial shareholders.

It is the latter factor that has got investor’s interest up in the potential for a takeover tussle to emerge, perhaps not unlike the shootout in 2020 between Chinese and Russian interests over the then ASX-listed Cardinal Resources.

Cardinal was the owner of the shovel-ready 5.1 million ounce Namdini gold project in Ghana and the Russian group Nordgold started the ball rolling with a 47.5c takeover bid worth $265 million in March 2020. Then China’s Shandong entered the fray.

The pair chased Cardinal all the way up to $1.05 a share before Shandong won the day with an increase in its bid to $1.075, valuing Cardinal at $595 million, or more than twice the value of the Russian’s initial bid.

Could a similar bidding duel be in the offing at Tietto? The Chinese state-owned Zhaojin Mining revealed itself as a 5.19% shareholder in July, only to go back under the substantial shareholder threshold in August before bobbing back up with a 7.25% stake on October 10.

That last move followed the Shanghai-listed and non-state controlled Chifeng Jilong Gold taking up a placement of Tietto shares in mid-September, giving it 7.89% of the company. And on Monday it said it had increased its position to 10.71%.

The mid-September placement to Chifeng raised $49.3 million. While it was said to provide funds for accelerated studies into a heap leach project at Abujar and to accelerate drilling to grow the resource, it can also be said it introduced some competitive tension on the share register.

Whether that tension spills over into a Cardinal-style bidding war remains to be seen. What is more certain is that analysts following the stock have 70-80c price targets on the stock in the absence of a takeover bid.

De Grey (ASX:DEG): It was trading mid-week at 97.5c for a market cap of $1.37 billion. It is exploring/developing its Mallina project gold as a 540,000 ounce-a-year producer expected to cost about $1.1 billion.

Gold Road (ASX:GOR), the $1.38 billion 50% partner in the 300,000-340,000 ounce a year Gruyere gold mine in WA, recently handed over $26 million to take up its full entitlement to De Grey’s $150 million capital raising at $1 a share.

That maintains its interest at 19.99% – a level otherwise known as a launch pad for a takeover bid if Gold Road so decides. It has the management expertise and the financial firepower to help make Mallina happen, either as a potential joint partner, or as its 100% owner after a takeover bid.

One thing is for sure, Gold Road did not take up its stake for a dividend flow from De Grey which is years off.

So the prospect for some corporate action is real. Should Gold Road decide De Grey is not for it, the 19.99% stake could be sold to a bigger gold company with takeover designs on De Grey and its world-class Mallina project.

The content of this podcast should not be considered financial or investment advice. All interviews and discussions are opinions only and the podcast has been created without taking into consideration the listeners’ financial objectives, financial situation or needs. Listeners should obtain independent advice before making any financial decisions.