Precious Metal Stock Takeovers: What To Make Of These Puny Premiums

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.

MontyHigh, www.worldofwallstreet.us

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.

Comments

[Melrune]

Hi Monty,

What do you think of La Mancha (LMA.to) as a take over target.

Cashflow for 2009 should be around 2.8, in 2010, it should go down to 2.1 which make this play quite interesting.

They have near 10M cash on hand, already are generating positive cash flow, so risk of bankrupcies is low. They operate 3 mines, so there is some good diversifications...

[NS]

Monty,

Concerning the WGW takeover, I have information from a reliable source that the WGW top management is scheduled to receive lucrative positions at NGD once the deal is complete. Perhaps that is why they agreed to a takeover at such low margin. They personally are getting a long term deal that, eventually, outweighs the gains they would've gotten from higher margins.

But props to you for suggesting the "may be they know something we don't" idea. Never let your guard down ...

NS

[Rich K]

you have to be careful about your assumptions-it could be that you are underestimating two extremely important priorities in ths current market environment:

1 Access to cash and financing
2 Liquidity concerns

Even if a company is cash flow positive, unless they have a hoard of cash, for small companies it will be difficult (expensive either in interest rates or dilution) to finance large exploration projects-and building out their expansion organically takes a lot of time-and time is risk-its easier to sell out for stock in a larger better capitalized company with better liquidity and improves your chances for success and also do it in less time-remember-theses are stock for stock deals-not cash payouts-that makes a huge difference-these insiders are still taking back paper in another gold company and you dont know for sure if they are selling their new shares or keeping them

Liquidity is also a concern -in this market environment I dont see a mad rush by individual investors to the jun ior mining stocks-probably because they are hurting financially and also somewhat risk averse to invest in an illiquid venture exchange listed security-hence the strategic buyers are the only current bid, and they are too smart to pay up-what we need is te dumb money to bid the junior prices up forcing the strategic investors to pay more-but that dynamic isnt happening due to the economic backdrop, the crisis, etc

[tooclassy]

I do think that Wheaton has raised the current price at least 50 percent or 50 cents over where it would be otherwise. But yes, it is low...not a 'fully valued price' (conversion rate, actually) by any measure. Wheaton signed the deal at a very low conversion rate. That conversion rate will likely result in a substantially higher price before the deal is finalized because I expect Wheaton to move up with higher silver prices soon. Then it will be the same conversion rate but a not-as-low price.

Furthermore, I hoping that Franco Nevada will jump in and offer a higher bid. And SST shareholders should vote no. If Wheaton thinks they won't get 67% approval, they will improve their offer and *still* be getting Silverstone cheap.

[MontyHigh]

I'll give you that one about the front running. Makes you want to just skip stock market investing given how crooked it is.

Would you agree that SLW got SST.V deal for a very low price? If not, what about you make you think differently? The fact of the copper related counter-party risk in their silver streams?

[tooclassy]

Hi Monty,

I think it is misleading to characterize the result of the Silver Wheaton buyout of Silverstone as "resulting in a 16% pop for Silverstone". The difference in closing price two days before the announcement compared to the closing price was around 45%. Frontrunners bid the stock up on the day before the announcement, so using the 1 day increase in price to prove a puny premium is misleading.