There have been three recent precious metal mining takeovers/mergers involving World Of Wallstreet covered stocks:
- New Gold Buys Western Goldfields - resulting in a 9% pop for Western Goldfields. New Gold, a bigger producer with growth opportunities but no cash, buys Western Goldfields, a cash-rich and cash generating producer with no growth prospects.
- Silver Wheaton Buys Silverstone Resources - resulting in a 16% pop for Silverstone. Silver Wheaton, the world's largest (and heavily in debt) silver stream (royalty) company buys its smaller and only competitor, Silver Stone resources. The buyout takes place at a price that values Silverstone's royalties at a much lower value than Silver Wheaton's to the point where John Doody classifies the deal as "Silver Wheaton stealing Silverstone".
- Gammon Gold Buys Capital Gold Corporation - resulting in a 7% pop for Capital Gold. Capital Gold is very much undervalued relative to Gammon Gold on the usual metrics: price to operating cash flow, price to annual oz and price to oz in the ground.
What are we to make of this? In all three cases we find smaller, illiquid companies which are profitable, with no financial troubles, accepting acquisitions at truly meager premiums from companies that could afford to pay a lot more and still have the acquisitions be accretive (that is, increase the value of the buying company). SilverStone, in particular, is controlled by the same extremely savvy management that controls the highly regarded copper miner, Capstone Mining (CS.TO). These guys are clearly not suckers.
It surely is an example of the managements and controlling shareholders of the smaller companies wanting to monetize their profits and get out. To "take the money and run". It is a serious vote of a lack of confidence in the outlook for precious metals in general and junior producing miners in particular. The managements and shareholders must have concluded there is serious risk of a downturn and decided it was time to turn their illiquid shares into shares that they can sell (en-mass) if need be. These guys are "smart money". These are guys who should have a better than amateur view of the precious metals outlook.
This could be because last year the top for precious metals came in around this time of year and managements and big shareholders fear a similar downturn. It could be because gold just attemped to push through to all time highs and fell back in a double-top formation. We don't know why the "smart money' sold. The "smart money" did not give their reasons. They just sold their big, illiquid positions when they had the chance, when they had a buyer ready to take their whole position for a minor premium.
So, again, what are we to make of this?
I consider this to be a significant data point. This piece may annoy "permabulls" which find the need to knock down any data which does not support their overall outlook. I am trying hard to look all the data in the eye and listen to it and form an outlook based on all the data, both bullish and bearish data. I respect the opinion of these "smart money" players, but form my own outlook based on more than just the opinions of these authorities. I consider these takeovers to be a significant data point, but not one that compels a reevaluation of my overall bullish outlook for undervalued Jr gold mining companies.
I do, however, consider this to be a signal that it is time to seriously start watching what is going on and be ready to reduce positions or exit the industry if a downturn in precious metals gathers strength. This despite what appears to me as the fundamentals for precious metals getting stronger and stronger. I intend to let any technical downturn confirm these guy's "smart money" outlook over my own outlook and trigger the selling my holdings, especially those with higher cash-costs.
Leave me a comment on what you make of these takeovers and what they mean.
P.S. dear reader. You have to make your own exit decisions if you hold any of the stocks I discuss on this web site. They are so illiquid that I cannot give you a warning of my exit until after I have sold my own shares.