On Monday I wrote an article in which I pointed out some of the mergers and acquisitions activity going on in the gold mining sector. I concluded by suggesting that investors should be on the lookout for takeover candidates amongst gold miners. My timing was excellent given the news that came out Tuesday morning that this trend is continuing.
Reuters reported that China Gold Stone Mining Development Ltd. made an offer to purchase Allied Nevada Gold (AMEX:ANV) for $7.50 per share, or $780 million. This is a substantial premium — 74 percent — to Monday’s closing price of $4.31 per share, which highlights the demand for high-quality gold mines that are selling at distressed prices.
Allied Nevada operates the Hycroft mine in Nevada. It is slated to produce 300,000 ounces of gold next year, and it has significant resources: more than 20 million ounces of gold and 900 million ounces of silver. The company’s cash-cost is just under $700 per ounce of gold produced, meaning that even with gold prices down, the mine can still be profitable.
Allied Nevada became extremely inexpensive as the gold price fell — in expanding its Hycroft operation, it incurred a significant amount of debt. Because the company has to pay interest on this debt, its effective cost of mining was substantially higher than it would have been otherwise. With a falling gold price and Allied Nevada’s steep financing obligations the company faced serious headwinds, and this pushed the stock down more than 90 percent peak to trough.
This situation made an investment in Allied Nevada a risky proposition, although one with a significant reward potential. However, from the perspective of a large mining company with deep pockets, a bullish outlook on the gold price, and a long-term agenda, owning a company such as Allied Nevada makes sense. This is presumably why China Gold Stone Mining Development stepped in with a take-out offer with a 74 percent premium.
However, the market remains skeptical. Allied Nevada shares trade at $6.44 per share, 14 percent below China Goldstone’s offer. Recall that we have recently seen similar skepticism regarding a Chinese company buying out an American one when Shanghui International made a take-out bid for Smithfield Foods, America’s largest pork producer. Some investors were concerned that there would be objections from Washington.
However the deal went through, as I suspect the Allied Nevada deal will. Therefore investors who are interested in arbitrage opportunities might want to consider a position in Allied Nevada.
Furthermore, I still believe that investors should be on the lookout for takeover candidates in the gold mining sector. Again, interested investors should look for companies with large producing mines with low production costs, as well as companies with mines that are adjacent to mines owned by larger, better-capitalized companies.
Update: Allied Nevada has said it believes that the take-out offer from China Goldstone is fake. In a press release, the company claims that it cannot find any information about China Gold Stone, and furthermore, that the offer has not been made formally. Allied Nevada urges shareholders to be cautious when considering this offer. As a result Allied Nevada shares have fallen to $4.57/share, which is far lower than the $7.50/share price tag from the alleged take-out offer. It is also far lower than the aforementioned $6.44/share at which the stock traded at when the deal was thought to be legitimate. Note that the deal may still be legitimate, and furthermore, that the market environment is still favorable for M&A activity in the gold mining sector.
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