Portfolio Update: Focusing on Takeover Candidates (February 14, 2017)

by FI Fighter on February 14, 2017

in Precious Metals Updates

For 2017, I am most bullish on the following commodities — Cobalt and silver. Having said that, by no means does my stance diminish my outlook for some of the other metals out there, particularly gold. In the end, it’s all about trying to make $$$ and getting into some of the better deals that Mr. Market gives to us (I’ll do my best to resist chasing momentum/hype like I typically tend to do… sigh).

Over the last few weeks, I have taken a good hard look at my mining portfolio, and after much contemplation, I came up with a few new ideas…

Most recently, I have made the following moves:

  • Sold out of B2Gold (BTG).
  • Sold out of Klondex Mines (KLDX).
  • Bought into Fortuna Silver (FSN).
  • Bought more Alicanto Minerals (AQI.AX).

And now, just shortly after those transactions, I’ve made it my renewed goal to focus on adding shares of companies that I think have a reasonable shot of becoming takeover candidates in the gold mining sector.

What’s a takeover candidate?

In simple terms, a junior mining company who owns such a high quality asset that pretty much any mid-tier/major producer will agree to pay good money to acquire it…

In the past, some of my best investments/speculations in the gold space were:

 

Getting a 30%+ premium is where it’s at! Yes, most definitely, I want many more of those type of assets in my portfolio! So, most recently, I made the following new purchases:

  • Bought 49,500 shares of Orezone Gold (ORZCF) @ $0.548/share (~C$0.7164/share).
  • Bought 100,000 shares of Avnel Gold (AVNZF) @ $0.246/share (~C$0.3216/share).

 

Straight up — I think that trying to pick out the next set of juniors that are well priced and primed for acquisition is a pretty freekin’ tough task… especially for a retail investor such as myself… Nevertheless, I’m going to put in the time and research to see if I can pick out some of the better companies…

Orezone Gold

Right now, and particularly from a deep value perspective, I really like Orezone Gold (ORE.V/ORZCF).

Not that long ago, Orezone was a darling of the gold mining industry, especially after shares or ORE.V rocketed over C$1.20/share and everyone was predicting an imminent takeover… Unfortunately for Orezone and its shareholders, the company ran into some speed bumps in August 2016, when it announced a project resource revision that saw the gold ounces from their 2013 Resource Update slashed by -30%.

From Orezone Gold.

OUCH!

Shares of ORE.V immediately responded to the news bombshell by tanking…

The following shows a 6 month chart of ORE.V, down -44%!

That sharp piercing spike you see in August is what a -30% reduction in mineral resources/reserves can do to a mining stock…

Luckily for Orezone, not all was lost… Orezone’s Bombore gold project (located in Burkina Faso) is a pretty large deposit that should still have enough economical oxide ounces in place to support putting a mine into commercial production… Bombore also has a lot of sulphide gold ounces, but those aren’t yet economical at today’s low gold prices… so they aren’t getting much (any) value at the moment…

Most recently, Orezone released a resource update, which has recovered back around +15% of those “lost” gold ounces from the Measured and Indicated (M&I) category… and about +10% of the “lost” oxide gold ounces (the ounces that matter most)…

From Orezone Gold.

Here’s a slide from the latest Corporate Presentation that illustrates where things stand right now for Bombore…

From Orezone Gold.

To backtrack for one second, when ORE.V was trading at C$1.20/share, the company boasted 1.964 million Oxidized Measured and Indicated gold ounces…

With the latest January 5, 2017 Mineral Resource Statement now in hand, shares of ORE.V are currently trading at C$0.68/share, while the company now features 1.487 million Oxidized Measured and Indicated gold ounces…

So, we are talking about ~40% haircut in share price for a decrease in ~25% of gold resources…

Is the glass half empty or half full with Orezone?

As is typical, when the market and shareholders have been burned before in the past, they are reluctant to trust and dive headfirst back into a story again…

For me, as someone who was previously sitting on the sidelines, whether we are talking about 1.964 million ounces or 1.487 million ounces, I think Bombore has enough going for it where it will be ultimately financed and put into commercial production (whether by Orezone or by an acquirer)…

And for me, that’s the bottom line…

Right now, I think the market is going to remain skeptical until the updated Feasibility Study gets published later in Q2 of this year, but of course if everything goes according to plan, you wouldn’t expect for shares of ORE.V to continue trading at the depressed price of C$0.68/share (well, that is unless the spot price of gold decides to nosedive from here)…

Please keep in mind — You only ever land deep value discounts when there are: risks, doubts, concerns, skeptics, haters, negative sentiment, etc…

Anyway, compared to its peers, I see a ton of upside potential in Orezone, so I’m a buyer here… and optimistically speaking, I think with more time and drilling, the resource will get upgraded again and more ounces will be added back (slowly but surely)…

Further, it sure doesn’t hurt at all that Orezone has a very competent and experienced management team (that previously developed and sold the MONSTER Essakane deposit to IAMGOLD in 2008), a tight share structure (fully diluted), no warrants outstanding, a lot of cash in the bank (C$25 million), zero debt, and Major Shareholder support from juggernauts the likes of: Sun Valley, Ross Beaty, and Sprott backing up this story…

From Orezone Gold.

Let’s also not forget, the last private placement raised funds at C$1.00/share, so anyone purchasing shares today is able to do so at about a 30% discount… and that’s NEVER a bad thing for retail investors!

From Orezone Gold.

Oh, and most importantly, it’s worth noting that large and economical 4.8 million ounce (total resource size including both oxides and sulphides) gold deposits don’t exactly grow on trees these days… They are actually quite rare and becoming more and more difficult to find…

Even in an extremely well endowed gold region like Burkina Faso, Bombore is a stand out project…

From Orezone Gold.

Again, I want a prospective takeout candidate, and in order to qualify, a company/project has got to have good size (in addition to being economical at today’s low prices) in order to be coveted by any potential suitors (~2 million+ total gold ounces, ideally)… Economical, but “smallish” mines probably aren’t going to move the needle enough for many of these producers to seriously consider buying… And similarly, MASSIVE deposits that are INSANELY CAPEX intensive are going to attract very few buyers… After being burned so badly from the last downcycle, I really think that the industry as a whole has learned an important lesson in regards to blowing money on marginal deposits (at least it should take a few good years of a bull market before they get all reckless again)…

In terms of both size AND economics, Bombore should definitely make the cut (but I guess we’ll find out for sure later this year when the revised FS is released), so I’m trying to get onboard the ORE.V train while shares are still depressed and trading at a large discount relative to some of the other advanced stage peers in the development space…

Avnel Gold

Next up, we’ve got Avnel Gold (AVK.TO/AVNZF), a gold developer out in Mali. Avnel Gold has got to be one of the most unheralded, unfollowed, and unknown names in the industry today…

Please note: The above share count of 309.93 million is outdated as it does now account for the in-the-money warrants, which were just recently exercised! There are now 375,193,300 shares issued and outstanding.

From Avnel Gold.

Up until this year, the share price performance of AVK.TO left a lot to be desired, but it’s gotten off to a nice start this year…

The following shows the YTD share price performance of AVK.TO, up 31%!

Why do I like Avnel Gold so much?

For starters, just like Orezone’s Bombore, Avnel’s flagship Kalana project has got good size (1.964 million ounces of gold in Proven and Probable Reserves), and decent grade…

Let’s look at how Kalana stacks up to its peer group…

From Avnel Gold.

And looking at project economics, which was recently optimized and revised by Avnel Gold.

At a base case of $1,200/oz gold, we’ve got a very robust after-tax Net Present Value (8% discount rate) of $250 million, and an after-tax Internal Rate of Return (IRR) of 50%, and a payback period of only 1.1 years.

When it comes to gold projects, Kalana’s economics aren’t just good, they are OUTSTANDING!

This is primarily due to the low initial CAPEX requirement, which was adjusted lower by $24 million

From Avnel Gold.

Initial capital expenditure has been lowered by $25 million to $171 million and, accounting for pre-commercial production revenue generated from processing historic tailings from the existing underground Kalana Gold Mine, the net funding requirement to commercial production, including contingency, is estimated at $139 million, approximately $24 million lower than previously estimated in the DFS.

Howard Miller, Chairman and CEO, stated “The optimised feasibility programs demonstrate significant financial improvements in the Kalana Main Project and on a sensitivity basis indicate attractive returns even at gold prices materially below the current spot price”.

Here is Kalana’s NPV and IRR @ $1,200/oz gold, relative to its peers.

From Avnel Gold.

Avnel Gold clearly looks promising relative to its peer group, in regards to project size, grade, and economics…

So, what’s the catch here? Why are shares of AVK.TO so undervalued and “cheap”?

From Avnel Gold.

From Avnel Gold.

There could be many reasons… but when it comes down to it, I think shares of AVK.TO are trading at a steep discount primarily due to the company operating out in Mali and the prevailing negative sentiment towards that region (despite the fact that many majors such as: Randgold;GOLD, B2Gold; BTG, IAMGOLD;IAG, etc., are currently operating/developing mines here)… Also, the lack of publicity/marketing, to a degree, keeps the share price of AVK.TO languishing behind its peer group…

Also, until most recently, there were a ton of warrants out, which created a lot of overhang for the stock…

Avnel Gold’s capital structure leaves a lot to be desired, I’m not going to lie… There are now over 375 million shares issued and outstanding, still a lot of stock options/warrants waiting to be exercised, ~414 million shares fully diluted… and this is all before project financing, which can easily push the number of total shares out well north of 500 million

That’s a lot of shares…

From Avnel Gold.

But on the brightside, Avnel Gold does have strong support from its Major Shareholders, most notably from Elliott Management (billionaire Paul Singer), Fern Trust (Avnel Gold CEO Howard Miller), and IAMGOLD.

In fact, the two largest shareholders control over 70% of the company (although the following slide is a bit old and may be slightly outdated)…

From Avnel Gold.

 

So, Avnel Gold looks to be “tightly held”, for the most part…

 

And with all the permits now in hand and a strong partner in the Malian government (which has a free-carried 20% interest in the project), the Kalana project is essentially shovel ready, and just waiting for a financing deal to be struck…

Or even better, a takeover at a premium from a mid-tier/major gold producer!

I guess we shall have to wait and see…

Summary

Due to the recent bear market across precious metals and mining (2011-2015), there has been a dearth of exploration done… But as well all know, mining is a depleting business, and at some point, the producer companies will need to look into the marketplace and make acquisitions to replenish their dwindling reserves base…

When will be the time when the next flurry of mergers and acquisitions (M&A) occur again, like it did during the first half of 2016?

M&A will probably pick up full steam when the spot price of gold heads north again…

I’m a speculator, no doubt, but I’m quite bullish on where I think metal prices are trending in the near future (the Reflation Trade is what they are calling it these days?)… Should that wonderful time roll around when M&A starts to boom again, yup, I want to make sure that I’m well positioned to capitalize…

To prepare, I’m going to try and buy up shares of the companies that I think have good sized, economical projects that are trading at attractive valuations relative to their peer group…

Right now, I really like Orezone Gold and Avnel Gold… I’ve been buying shares of both companies all week, and I’m probably not done… yet…

 

As ALWAYS, please do your own research and due diligence before making any kind of financial decision! I am ONLY sharing with you what I am doing with my own money… I don’t give out investment advice, ever!

 

Fight On!

{ 4 comments… read them below or add one }

1 Jay GNo Gravatar February 15, 2017 at 12:29 am

Thanks for the info, both look compelling at a glance.

Regarding cobalt… I’d been watching eCobalt Solutions since mid-January hoping for a pullback into the $0.50 range, but it broke out instead. Promised myself no more chasing up… easier said than done, as the few times i’ve done it it’s actually worked out amazingly well, somehow.

On another note, I’m bullish on the space overall but can’t help but imagine a broad market selloff wiping out all my unrealized profits. I’ve been telling myself to buy some VIX calls for a few weeks now, haven’t got around to it. Do you see that as a reasonable strategy to protect against a broad market selloff scenario? It’s basically been 4 months since we made a move over 15 in the VIX. Taking a step back it just seems like (even under “normal” circumstances) we’re overdue for a spike, let alone given the current state of affairs in the world.

Reply

2 FI FighterNo Gravatar February 15, 2017 at 12:38 am

Jay,

Yeah, chasing up has been my biggest downfall, and although I do my best to avoid doing it too often, I think it’s just human nature and instincts to want to buy when price action is moving up… eCobalt really popped this week, so I’m waiting on the sidelines for sure on that one…

In regards to VIX, anytime it hovers near/at 52 week lows, it looks extremely appealing from a risk vs. reward perspective. You’re definitely right, the markets have only moved in one direction and I’m amazed with how one sided the direction is right now… I expect a lot more volatility moving forward as well…

The only real way I know to protect is to hedge… In my own case, I try and avoid shorting or using put options (I really suck with time decay and expiration), but instead I hold a lot of cash… So, if we see a massive dip, I’ll “back up the truck” and buy hand over fist…

If there is volatility, perhaps the gold stocks do well… who knows?

All the best!

Reply

3 SriniNo Gravatar February 16, 2017 at 2:54 am

Jay, I am intrigued to see your portfolio consistently having ~24 companies. Tells me that you spend good time tracking em which is mandatory

Having sold klondex, i am down to 7 Juniors ( 3 Silver & 4 Gold ). I initially had 10 and now consolidated them to few.

cheers
Srini

Reply

4 SimonNo Gravatar February 16, 2017 at 8:52 am

Hey Jay,
Hope you been well man in Asia. Great article post.
Question, I see the Orezone holding is listed as in two different price point. Under CVE.ORE it is listed as .70 per share but under the ORZCF ticket. It is listed as .54 per share.

Reply

Leave a Comment

 

{ 1 trackback }

Previous post:

Next post:

Copyright © 2012 FI Fighter