Barry FitzGerald: The juniors shaping up as ‘high probability’ takeover targets in 2019
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The return of merger and acquisition activity was a key theme for the resources sector in 2018. And the tip is that more M&A activity is in store in 2019 as producers respond to a call from investors for more growth.
This year’s step-up in M&A activity was a marked change from the inward-looking austerity in the preceding five years during which companies were compelled to focus on balance sheet repair, improving margins by cost-cutting, and delivering greater shareholder returns.
But with commodity prices coming off their peak levels, investors are now encouraging companies to once again look to judicious M&A activity to deliver some sure-fire growth.
The gold sector in particular is ripe for the step up in M&A activity in 2018 to spill over into the new year. That’s because unlike nearly all of the other commodity prices, gold in Australian dollar terms continues to be strong, allowing the bulk of the industry to generate fat margins on its production.
Most of the gold producers have swollen bank balances and have stepped up their exploration efforts accordingly. But the drill bit cannot not be relied on to deliver new growth opportunities. M&A activity offers the quick growth fix, assuming the bidder gets things right.
Investing in likely takeover stocks is no recipe for success. But when a takeover bid does appear, it can be particularly rewarding, with recent M&A activity indicating premiums to pre-bid prices of 50 per cent have become the norm compared with historical 30 per cent premiums.
Perth stockbroker and corporate finance group Argonaut said in a recent wrap of 2018 that it is junior explorers with quality exploration projects that show growth potential, or are on the cusp of development, that are attracting interest from producers and/or strategic investors.
It came up with a list of “predicted future targets” which it considers to have a “high probability” of becoming takeover targets.
Genesis Minerals (GMD:ASX) – Trading at 3.3c
Argonaut said the company’s Ulysses gold deposit (recently upgraded to 760,000 oz) made it a potential low-cost and attractive acquisition for one of the producers with treatment plants within a 150km radius. Potential predators on that basis include St Barbara, Zijin Mining, Dacian Gold, and Saracen Holdings.
Gascoyne Resources (GCY:ASX) – Trading at 11c
Its Dalgaranga project is an emerging producer with 100kozpa production and forecast low AISC. “In lieu of the recent management changes and corresponding share price decline, the takeover potential of Gascoyne has heightened dramatically,” Argonaut said.
MOD Resources (MOD:ASX) – Trading at 27c
MOD is defining a high-grade copper resource in Botswana. “As there are few high grade, near surface copper projects in favourable jurisdictions globally, we believe it has high corporate appeal,” Argonaut said. It added that MOD’s project has “belt scale” potential, something that mid-tier and large cap miners are looking out for.
Paringa Resources (PNL:ASX) – Trading at 18c
The company is fully funded to develop its Buck Creek thermal coal project in the Illinois Basin in the US. “We see Alliance Resource Partners (ARLP:NASDAQ) as the likely acquirer as they operate three surrounding mines and would likely protect their dominance in the Ohio River coal market,” Argonaut said.
Explaurum (EXU:ASX) – Trading at 12c
It is already the subject of a renewed and improved offer from gold producer Ramelius. Success would deliver increased production and mine life at Ramelius’ Edna May operation. But the improved offer is conditional on Explaurum shareholders not approving an $8m placement to Alkane Resources.
Readers will remember Garimpeiro came up recently with his own list of likely takeover candidates. There was agreement on Genesis, and some other names to watch in 2018 – Ausgold (AUC), Bellevue (BGL), Breaker (BRB), Echo (EAR),West African (WAF), Cardinal (CDV) and Golden Rim (GMR).