The Buyout Frenzy Coming to Gold — Australian Gold Stocks
Now this is interesting. Last week I told my paid subscribers it was highly likely we were going to see buyouts in the gold sector.
And that’s what showed up yesterday. But not quite the way I expected.
Nonetheless, I think it’s a sign of things to come! There could be money to be made here.
What’s the story?
Evolution Mining Ltd [ASX:EVN] wants to buy a Canadian gold company called Battle North. EVN are happy to pay CA$2.65 per share — a 46% premium to the previous closing price of Battle North.
It’s not a done deal yet. Evolution needs 66% of Battle North shareholders to give the go ahead.
Those Battle North shareholders should be happy either way…the stock soared 41% once trading began.
There’s a reason I didn’t quite expect this. My eyes have been on the Australian juniors as potential targets. I’ve never even heard of Battle North.
But it is a known fact that some of the bigger Aussie gold companies are keen to buy future production ounces.
But the Evolution deal is proof that the basic thesis about M and A in the gold sector is on track.
Why did it happen now?
One major reason is that Battle North shares were down 15% from their high of last year. That’s because the gold sector is off the boil.
I can tell you that some Australian gold shares are down much more than 15%.
That means any gold producer with lots of cash is in the perfect position to go shopping! The discounts are BIG.
The market was happy with the EVN deal too.
Evolution Mining shares closed up yesterday.
Often the company that makes the offer will sell down if investors are unsure of the strategic rationale or the price.
What does this mean for us now?
It’s a perfect time to consider which Australian gold stocks could be takeover targets.
You do need some knowledge of the industry here.
The reason Evolution went for Battle North is that EVN already owns another Canadian gold operation next door. It can stick the two together to create a bigger, unified operation.
That lends me to think that a takeover offer in Australia is more likely to come for a junior in Western Australia because there are so many established gold companies there already.
That may not happen. Ultimately, gold producers need gold reserves and, if they get desperate enough, will take them wherever they can get them at the right price.
But the synergies work better if two operations can complement each other by, say, lowering costs due to a higher production rate.
Regardless, there are multiple Aussie gold companies on the hunt.
These companies have huge cash hoards that just keep getting bigger as the gold boom runs on. Gold stocks may be in the toilet, sentiment wise, but they still have very good margins.
And we can’t forget the low cost of debt! There’s plenty of cheap money around to finance a deal.
Now, it’s one thing to make a case for the junior sector to see merger and acquisition activity. It’s another to find the one or two that actually soar 30% or more in a day. There’s no guarantee an offer will ever come.
What to do in this situation?
Expect the next 10 years to be a lot more exciting in the commodity space
Well, my approach is to find a gold stock that I’m happy to own even if a takeover doesn’t come.
For my money, that means a stock that is, or very close to, producing already. That derisks the idea somewhat in my book.
If you’re happy to go up the risk scale, then a developer or explorer is an option.
Speaking more broadly, I think we are going to see merger and acquisition activity really heat up across the Australian market. I’m not just talking about gold.
So many Aussie stocks are cheap! There are still a bunch of Aussie property names trading below their net asset value too. Plus there are some very juicy yields across the mining sector.
Now, high yields can be a warning sign that the market is suspicious in some way.
But I do think that the mining sector has been left behind a bit too, relative to the exploding interest in tech stocks over the last couple of years.
That will change if current trends in commodity prices continue, as I think they will.
There just hasn’t been enough investment to keep up with supply demands in the years ahead. I’ve been tracking, trading, and writing about mining on the ASX for 10 years.
I expect the next 10 years to be a lot more exciting in the commodity space than the last.
Editor, The Daily Reckoning Australia