McEwen Mining Inc (MUX)

[JD400]

Yellow Meddle: Investors Scuttling Gold Miner M&A

Mergermarket , Contributor

Opinions expressed by Forbes Contributors are their own.

By Nate Trela

The price of gold is about $1,285 an ounce, up more than 22% from when it bottomed out in December 2015. And the gold company benchmark VanEck Vectors Gold Miners ETF is up 86% since the beginning of 2016.

On the surface, it looks like prime conditions for a boom of gold M&A. But negative investor reactions to the few deals done this year are making gold companies afraid to deal, according to gold executives, advisors and investors speaking to this news service. The explanations for the markets adverse reactions have ranged from displeasure with the results of transactions in recent years to traders taking advantage of arbitrage opportunities. Whatever the reason, through three quarters, the total value of mining deals involving North American companies is $3.7 billion -- down 40% from the same time in 2016, according to Mergermarket data.

"I look around here and I see a lot of people who are discouraged. Part of that is that we are, unfairly, all tarred with the same brush. We pay for each other's mistakes," B2Gold CEO Clive Johnson said speaking to this news service on the sidelines of the Denver Gold Forum last month in Colorado Springs, Colorado. He also noted that aversion to jurisdictional risk and a lack of quality targets in safer places have limited the pool of possible acquisitions, with miners increasingly looking to new areas of safe jurisdictions.

Shares in B2Gold are trading around $3.30 Canadian today, and Johnson said that in typical markets he would expect to be a target, given the upside of B2's mines coming online, "but nobody really has the courage to make a move on something this big because they'll get hammered. You have to be bold."

The largest non-royalty buy by a North America-listed gold company this year is Alamos Gold’s $683 million all-stock takeover bid for Richmont Mines announced on Sept. 11, according to Mergermarket data.

Investors punished Alamos, pushing its share price down nearly 18% on the news and making it a potential takeover target in its own right, this news service reported.

Alamos CEO John McCluskey blamed certain investors going long on the target and short on the bidder for the stock plummeting. It is trading around $8.95 Canadian today.

"It's not a 'these days' thing," McCluskey said of the arbitrage plays. "The market has always done this. It's just much more pronounced now."

McEwen Mining made two acquisitions in 2017, paying $35 million to Primero Mining for Black Fox and acquiring Lexam for $53 million. The deals gave it producing assets and exploration targets in Ontario. After the deals, MUX shares are less than half of a 52-week high and its market cap is around $680 million. Chairman Rob McEwen said he did not anticipate the market's negative reaction.

"We were buying an asset that strategically fit with our objectives and I was a little surprised the stock sold down very fast," McEwen said of the fall after the Black Fox deal. In hindsight, the company could have been more aggressive in promoting the benefits of the transaction, he said.

While not identifying specific firms, McEwen posited that gold companies are more susceptible to big swings in their market caps because only a small portion of the market invests in gold stocks. He noted that Newmont Mining, the only gold company in the S&P 500, represents less than one half of 1% of the index.

"There's a lot of capital and frankly not many people paying attention to gold, and those that are have been around a while," McEwen said. "They may think that every deal is going to be a bad deal, given recent history."

To be sure, some investors are not cheerful about gold M&A.

Marcelo Kim, a partner at hedge fund Paulson & Co., launched a broadside against gold company in a presentation at the Denver Gold show. Kim blasted "capital destruction" - in the form of overpriced acquisitions and cost overruns while building mines - that led gold companies to write off $85 billion since 2010. He built his presentation around a call to form the Shareholders Gold Council, which he said would represent and advocate for the interests of investors and issue voting recommendations on issues such as M&A and executive pay. The investors who spoke with Kim in a Q&A after the presentation were mixed in their response, with some agreeing with the points but others indicating they have been satisfied with the returns.

Since the event, Kim said he has met with other investor groups that are on board with the concept of the council in principle and are working through internal compliance issues before they can join.

"Too many companies are stricken with the kind of management that will make deals even if the numbers don't work," Kim said in a follow-up interview. "There's too much misalignment between shareholders and boards and management."

Investor reluctance is one reason Endeavour Mining broke off M&A talks with Acacia Mining in March after the Tanzanian government instituted an export ban on some of Acacia’s products, said CEO Sebastian de Montessus. Goldcorp CEO David Garofalo acknowledged "a bit of an M&A overhang" on the company's stock after two acquisitions this year and joked at Denver Gold about going to as many media outlets as possible to make clear the company was not looking for buys for a while.

A second investor said the market is willing to acknowledge its mistakes, pointing to Kirkland Lake Gold's movement over the past year since it acquired Newmarket Gold. When the deal was announced in September 2016, Kirkland Lake shares tumbled 37%, but have since recovered, and are trading 60% higher than before the deal. At the time of the announcement, Kirkland Lake and Newmarket had a combined market cap of about $1.8 billion. Today, the company created in the deal has a market cap of about $2.8 billion.

Sean Boyd, Agnico's vice chairman and CEO, said he has seen "a lot of smart deals done" in the past two years, but was concerned that with production cliffs approaching for gold companies that did not invest in development during the downturn, there could be a rush to make deals to keep production up.

"I do think there are too many players right now and something has to give," Boyd said. "How it plays out, it's hard to say. But the industry needs to shrink."

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