On May 6th, Federal Reserve Chair Janet Yellen shot an arrow across the bow of the US bull market by stating,
“I would highlight that equity-market valuations at this point generally are quite high.”
Although the rally in US equities from the lows of 2009 is not outlandish (from a percentage standpoint) when compared to past bull markets, the lack of fundamental strength behind the US and global economy is likely what caused Yellen to make such a remark. And when one of the most dovish Fed chairs of all-time makes such a statement, it should give investors pause.
The below chart highlights the length of the current bull market. As of the first week of May, it became the third longest in US history.
One of the top bond investors on the planet, Bill Gross, recently concluded his monthly investment outlook — aptly titled A Sense of an Ending — with these ominous statements:
“As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.”
source: https://www.janus.com/bill-gross-investment-outlook
With US equities pushed to the max, North American real estate (majority of hub cities) in a bubble and one interest rate hike away from correcting, inflation eating away at savings accounts, and bonds as pricey as they’ve ever been, there is one question investors are asking: What asset class is cheap?
Bear Market in Mining Sector near over
The mining industry has been in a bear market for nearly a half-decade. While tech stocks, banks and bonds surged, miners have collapsed and been ignored by investors. But things are changing on the mining front, and the tide may be turning right before our eyes. M&A activity in the junior resource sector has been picking up… and for good reason.
With the severity of this bear market in mining stocks reaching historic proportions, is it not prudent to consider this sector when looking for value?
Mining Sector: the Smartest Money in the Room
When it comes to the mining sector, the smartest money in the room belongs to senior producers. If this group of investors — and that is exactly what they are — sees value in distressed assets and is buying, there are deals to be had.
In an article published at Pinnacle Digest on January 19th, 2015 titled Let the buyouts begin: Goldcorp agrees to buy Probe Mines for C$526 million we discuss the impact of such a purchase from an industry leader:
“While Goldcorp’s buyout of Probe Mines in no way justifies a trend, or even the beginning of a new bull market, it cannot be ignored. Buyouts and takeovers have long ushered in bull markets and lead to increased liquidity and financing availability in the junior resource sector. If gold can continue higher, this will not be the last major buyout we see in Q1.”
While gold has not surged higher, it has held up quite well, currently sitting around $1,225 per ounce. More importantly, and as expected, a number of buyouts took place in and around Q1, signalling that majors see value in the junior mining sector (more on this shortly).
Commodities endure 2nd worst sell off in 40 years
The chart below highlights the bull and bear markets in the commodity sector via the Reuters/Jefferies Commodity Research Index. It was produced by The Short Side of Long on April 15th, 2015. Its editor commented that:
“Furthermore, the recent crash in commodity prices on annualised performance basis is down 30% from 12 months ago, which is the second worst price sell off in such a period in almost four decades.”
So, with commodities having suffered the 2nd worst decline in near 40 years — many of them off roughly 50% in the past 4 or 5 years — calling them ‘cheap’ seems appropriate. Go one step further and take a look at commodities such as natural gas and uranium… they’ve been in bear markets for nearly a decade.
Mike Boyd, the head of global M&A at Canadian Imperial Bank of Commerce, made these comments in a recent Financial Post article titled Cheap prices should fuel gold mining deals:
“We’ll see activity in the gold sector increase regardless of what happens with the gold price.”
And that:
“People will want to pursue consolidation and try to drive down their cost structures.”
Click the below image to download our latest EBook which highlights 50 of the most influential leaders and the small-caps they led to stunning buyouts. In addition, we reveal the small-cap companies these titans of the small-cap space are running today.
Mining Buyouts Validate Value Proposition
Investors speculate as to the value of just about everything; but, until a bid comes in, no one really knows what something is truly worth. And that’s what makes mergers and acquisitions so important for you to track. They serve as benchmark valuators.
On March 26th, Allana Potash announced a C$137 million takeover bid from fertilizer heavyweight, Israel Chemicals Ltd (ICL).
One important characteristic to look for when evaluating if a junior may become a buyout target is current ownership from a major. While significant ownership by one major may dissuade others from taking a run at a particular junior, statistically, it increases the odds of an eventual takeover scenario. Majors take minority stakes in junior miners to get their feet wet, and establish rapport so that they have a spot at the front of the line if the project(s) proves fruitful. Just look at Allana Potash for an example.
On March 26th a takeover bid announcement was made that stated:
“ICL currently holds 16.36% of Allana’s shares which it acquired in 2014, and has offered to acquire all of the other outstanding common shares of Allana.”
Allana Potash announced a positive preliminary economic assessment for its Danakhil Potash Project onMarch 2nd, less than a month prior to the announcement of the takeover deal.
The PEA revealed an after-tax Net Present Value of US $1.6 billion, among other key metrics. Significant events and announcements such as an updated PEA, which help to clarify and estimate potential future costs, go a long way in persuading many senior producers.
Mining Sector: Junior Gold Stocks On the Discount Rack
Roughly two weeks later, on April 10th, another beaten down junior mining stock, this time in the gold sector, was the target of a buyout offer. It was reported that Soltoro and its Mexican gold assets are to 
be acquired by Agnico Eagle Mines in a deal worth approximately C$31.6 million.
Soltoro stated that, “The offer represents a premium of approximately 51% to the volume weighted average price of Soltoro common shares on the TSX Venture Exchange (the “TSXV”) for the 20 day period ended April 9, 2015 and a premium of 55% to the last trading day prior to the announcement of the transaction.”
Click here for full press release.
This was an interesting buyout as it represents yet another deeply depressed junior miner being taken out at a significant discount to trading levels in 2012 and 2013. As we witnessed several times over the last few months, at some point, value emerges in many juniors and majors can’t sit idle.
Mining Buyouts Leave Behind Clues
The next buyout we’re about to feature may have given investors a tip that Soltoro was a company of
interest. You see, past acquisitions by majors can leave behind clues about the region, and lead to early notifications for possible future buyouts.
In September of 2014, Agnico Eagle Mines announced the acquisition of Cayden Resources and its approximate 400 square kilometer block in Jalisco state, Mexico for C$205 million. The takeover valued Cayden at $3.79 per share – a premium of 42.5% to the company’s 10-day trading range on the TSX Venture. The deal was finalized on November 28th of 2014. Speculation that Agnico Eagle Mines had visions of consolidating some of this particular region in Mexico for future development were confirmed when it submitted its bid to purchase Soltoro just five months later.
In respect to the buyout, and Soltoro’s holdings, mining.com reported,“The property lies contiguous to the El Barqueno deposit which was acquired in 2014 by Agnico Eagle through the purchase of Cayden Resources for $205 million.”
Less than a month ago, on the 24th of April, another junior miner, Mega Precious Metals, announced a buyout deal with Yamana Gold. It was reported that:
“The total consideration to Mega shareholders is approximately C$17.5 million, based on the Company’s issued current and outstanding shares. Yamana has also agreed to purchase the outstanding convertible debentures held by Pacific Road Capital Resources Funds.”
The Company’s portfolio includes the flagship Monument Bay Gold Tungsten Project in NE Manitoba as well as the N. Madsen Gold Project in the prolific gold mining district of Red Lake, Ontario.
Three things are happening in North America’s junior resource market right now that are leading seniors to take action:
1. Financings are down significantly in 2015 as junior miners continue to struggle in the marketplace. Naturally, this will result in fewer discoveries in the coming years.
Statistically, the world hit a peak in gold discoveries (based on new ounces discovered in a calendar year) in 1995, according to a recent Goldcorp presentation. We explained the theory of ‘Peak Gold’ in a Marchreport.
The broad decline in the mining sector has all but guaranteed minimal discoveries in the immediate future. Majors appear to have picked up on this fact, and are actively looking to pad their reserves now, while prices are depressed…
2. New listings, including IPOs, reverse takeovers and qualifying transactions have been down for 3 consecutive years in the mining sector. On the TSX Venture there were 118 new listings in 2011, 81 in 2012, 38 in 2013 and just 21 in 2014, according to TMX Group Ltd. There were only 6 new mining issuers listed on the TSX Venture in Q1 2015. Bear in mind, for more than a decade the TSX Venture has been the world’s preeminent exchange for junior mining issuers.
source of stats: http://www.vancouversun.com/business/mining+firms+creative+raise+capital…
Once again, the lack of new issuers on the exchange will lead to fewer discoveries.
3. As expected, delistings in the mining sector are also on the rise. After years of pinching pennies, and hoping things would turn around, many zombie shells are finally throwing in the towel. On the TSXV there were 27 total delistings in 2012, 40 in 2013 and 61 in 2014, according to the TMX Group Ltd. There have already been a whopping 19 delistings in the mining sector in Q1 2015. If this rate of delistings continues for the next 3 quarters, it will be the worst year in over a decade. But in every crisis there is opportunity…
source of stats: http://www.vancouversun.com/business/mining+firms+creative+raise+capital…
Junior Mining Darwinism
It has been painful to watch, but the lack of funding available for explorers, and the substantial amount of delistings, has cleaned up the junior mining space.
In this environment, the only juniors raising money or sitting on substantial capital in their treasury, are ones with credible management, truly attractive/economic mineral deposits, and/or a clear shot at production. So the result of these consecutive tumultuous years for miners has actually made it easier for the retail investor to find well-positioned deals – simply because there is less clutter. Only the strong have survived this near half-decade bear.
The Questions
If senior producers are taking advantage of depressed commodity prices, from potash to uranium and gold — by means of acquiring juniors and their assets — shouldn’t the retail investor? And with US equity valuations being “generally quite high” according to Fed Chair Yellen, would it be crazy to assume that institutional investors may begin looking elsewhere for value – perhaps the beaten down commodity space?
Many quality juniors have been painted with the same brush as their less than fortunate cash-strapped peers during this near half-decade mining bear. As such, it is our strong opinion that despair has transformed into opportunity for the savvy and well-read mining investor…
All the best with your investments,
PINNACLEDIGEST.COM
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