Midas Gold Is an Undervalued Takeover Target
As gold prices stabilize and ultimately move higher, I think we are going to see a lot of consolidation in the mining sector. Large gold mining companies are depleting their resources. At the same time, a lot of small companies have resources, but they don’t have the funding to bring their mines into production. There are dozens, and perhaps hundreds of companies in this predicament, and while there are ways for these companies to find funding, many of them are going to see large companies come in with bids offering instant 30 percent – 70 percent premiums to their market valuations. The companies most likely to see these sorts of takeover bids are companies with low market capitalizations and large resources in geopolitically safe parts of the world.
One such company is Midas Gold (OTCMKTS:MDRPF). Midas Gold has a market capitalization of $122 million. It is currently in the process of developing its large Idaho gold mine, Golden Meadows.
Golden Meadows is a large property with 7 million ounces of gold at around 1.6 grams per tonne, and it will be able to produce roughly 400,000 ounces annually for the first eight years of the mine’s life, and 300,000 ounces annually during the mine’s later years. Furthermore, the mine will be able to produce this gold at just $800/ounce, meaning that it will be extremely profitable to operate once it is in production. At 400,000 ounces and $1,300/ounce gold, the mine will produce an incredible $200 million in annual cash flow.
But while this is an excellent resource trading with a seemingly low valuation, potential investors need to consider the following. First, we don’t know how long it will take the company to bring Golden Meadows into production. Midas Gold needs to complete a feasibility study, obtain permits, raise capital, and then construct a very large mine. This will probably take three years or more. Second, the company estimates that it will need $880 million in order to build the Golden Meadows mine. This is very difficult for a company that has no revenue and a market capitalization of just $122 million.
While the company can theoretically raise this much capital, I think there is a good chance that a large mining company will come to shareholders with an offer of, say, $175 million. First, it is profitable for a larger mining company to buy Midas Gold or a similar company. This company will assume that it is paying $175 million plus $880 million to develop the mine for a total of $1.055 billion investment. The end result would be $200 million in annual cash flow for the first eight years of the mine’s life at the current gold price, and far more should the gold price rise. The resource has already been studied and measured, and the mine plan has already been developed. This takes care of a lot of the work that larger mining companies typically don’t focus on (they focus on producing resources efficiently.)
Second, Idaho is a relatively safe place to mine. Regulation and government policy are relatively predictable in Idaho whereas this isn’t the case in, say, Romania.
Third, Golden Meadows is a large project. A company such as Goldcorp (NYSE:GG) that has 3 million ounces of annual production is going to focus on a few large projects rather than several small projects, which would be managed less efficiently from the top of the corporate pyramid. True, it may find more value in a small mine with, say, 50,000 ounces of annual production, but such a project wouldn’t move the needle. Golden Meadows, with 400,000 ounces of annual production, is going to make a difference in any large mining company’s portfolio.
With all of these points in mind, I think there is an excellent chance that Midas Gold will be targeted by larger gold companies as a potential takeover candidate. Thus, investors can profit either from the premium paid by the acquiring company or from appreciation in response to a higher gold price. Given that Midas Gold is a small company with no revenues, it is a speculative investment. However, investors who are bullish on the price of gold and who are willing to gamble a bit should consider adding some shares of Midas Gold to their portfolios.