TMAC Resources (TMR.TO) – Merger Arbitrage – 14% Upside

Current Price: C$1.54

Offer Price: C$1.75

Upside: 14%

Expected Closing: Q3 2020

Information Circular


On the 8th of May it was announced that Canadian gold miner TMAC Resources is getting acquired by Chinese mining giant Shandong Gold (ref. SD Gold) for C$1.75/share in cash. 2/3rds majority shareholder approvals is required. 62.4% including the two largest shareholders Resource Capital Funds (27.6%) and Newmont (24.8%) have already agreed to vote in favor. Meeting will take place on the 26th of June. This is a $149m transaction, so regulatory approval shouldn’t be a problem. Overall, it seems pretty much like a done deal, so the 14% spread is quite confusing at the moment.

(Update: the spread is actually justified with regulatory issues – see the comment section below).


Shandong Gold

SD Gold is the largest gold producer in China with a market cap of US$14.5bn, so this acquisition is a tiny long-term strategic transaction with a goal to expand in North Canada. The buyer should be well familiarized with the target company already (PR), “Over the past several months, SD GOLD has completed a significant due diligence review of TMAC, including a site visit to Hope Bay earlier this year”. Transaction is not subject to financing and shouldn’t be an issue anyways – at the end of ’19 SD Gold held C$500m of cash vs. C$210m needed for the transaction. Moreover, Shandong is already invested in TMAC – in May’20 it acquired 9.2% ownership the through a private placement priced at C$1.75/share (C$21m in total).

The transaction also comes at an opportunistic timing – TMAC has been pressured by the COVID-19 (reduced operations and development activities, suspended exploration etc.) and the offer is priced only at a tiny premium (3%) to the beginning of March trading levels and 28% discount to early Feb’20 levels. Meanwhile, gold price increased by 9% since Feb’20 and now stands at 7-8 year high.

Thus, the risk of buyer walking away seems very low.


TMAC Resources

The company owns 100% of the Hope Bay Property (North Canada), which it acquired from Newmont in 2013. The property has 3 mine resources – Doris, Madrid and Boston. TMAC is using only a very limited potential of the mines and conducts underground mining only in Doris and a bit of surface mining in Madrid –  overall about 2k tonnes per day (TPD) of production capacity. However, Doris life of mine (LOM) is coming to an end (2023) and the company plans to move its operations to Madrid in 2024, where a new 4k TPD plant should be constructed. Nonetheless, the calculated expansion costs are quite high (C$1.3bn) and unlikely to be funded without a partner. Since starting the production in 2017 TMAC continues to operate at a loss and has C$190m of debt already. Prompted by the two largest shareholders, the company started a strategic review in Jan’20. As summed up by the CEO in the acquisition PR:

If the sale to the Guarantor were not completed, the Company would have significant uncertainty as to its ability to fund the investment required to realize the potential of Hope Bay, and therefore work within the limitations of the current underperforming processing plant, underdeveloped mines, minimal exploration budget and challenged balance sheet.

And Shandong CEO:

Hope Bay is a highly prospective high-grade gold camp which requires substantial investment to optimize production and extend mine life and maximize the value of the camp to the benefit of all stakeholders.


31 thoughts on “TMAC Resources (TMR.TO) – Merger Arbitrage – 14% Upside”

  1. Did a bit more digging on TMAC, so after all it seems that the upside is far from being “free” here:

    Transaction requires regulatory approvals from Canadian regulators (Competition Act Clearance and Investment Canada Act Approval) + Chinese regulatory consent. All of these seem pretty standard and as mentioned in the write-up, should normally not be an issue. For example, in March’20 Chinese Zijin Mining completed a C$1.4bn acquisition of Continental Gold. Investment Canada and PRC approvals were also required, but competition consent was unnecessary as the asset of Continental Gold lies in Latin America. So again, given the size of the transaction there should be no issues for TMAC here.

    Despite that, the transaction could potentially get blocked on national security concerns. Because of the vulnerable position that many companies are currently in (after COVID-19), the concerns over foreign takeovers are elevated. In April EU competition chief has even recommended EU countries to buy stakes in companies to prevent takeover threats. Meanwhile, Canadian regulators increased the scrutiny as well and apparently started reviewing nearly every takeover on national security grounds.

    “The two specific types of investments the government will scrutinize with particular attention until the economy recovers from the effects of COVID-19, regardless of their value:
    – controlling or non-controlling investments in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the government; and
    – all investments by state-owned investors, or private investors assessed as being closely tied to or subject to direction from foreign governments.”

    TMAC takeover marks the second checkpoint as SD Gold is a state-owned enterprise. I am not sure how strongly this can impact the whole situation, however it should be noted that in 2018 Canadian regulators blocked a $1.5bn Chinese SOE takeover of Canadian construction company Aecon. So the current regulatory environment is even more rough, but then again, TMAC acquisition is a different and a much smaller deal, while so far I’ve found no recent (after COVID-19) examples of a foreign deal getting rejected on national concerns.

    What doesn’t help, however, is that TMAC property is located in the Arctic, which is increasingly being considered as a “strategic” location and moreover, several mining projects in the same region (Nunavut) are already controlled by state-owned China Minmetals Corporation that holds 74% stake in MMG Canada.

    Furthermore, the transaction is also conditioned on “Site visit” (certain Shandong executives visiting the Hope Bay) and “Handover” (representatives of the buyer traveling to TMAC in order to bring the PRC approval and assist with deal closure). Given the current travel environment, this could be problematic. Although COVID-19 cases in Canada are continuously dropping, travel restrictions have recently been extended until 23rd of July. Meanwhile, China could potentially be facing a second wave of the virus – Beijing (20m people) has been lockdowned again over the last week after a few weeks of no new cases. These two conditions have to be satisfied until the 8th of November (can be extended until 8th of Feb’21), so on the other hand, 5-8 months could be enough to lift the travel ban.

    In case the deal is blocked or breaks – downside could be very significant, as the prospects of another buyer coming in seem quite low. During the strategic review 29 parties have entered into confidentiality agreements and only 6 presented non-binding proposals (3 of them were for financing, not acquisition). In the end, only Shandong presented a firm offer (although cut down from the initial non-binding proposal of C$2/share), while apparently there was also another party that remained interested, but only in potential financing and participation in restructuring of the company.

    So overall, it seems that the spread reflects the risks more than appropriately here.

    • Interesting to post these edge cases or ‘value traps’ (for a lack of a better term) every once in a while. They are useful to learn from!

    • Well, apart from being a larger deal, Aecon builds, maintains and decommissions nuclear power plants in Canada ( ). So I’m not sure if that’s a relevant comparison: from a regulatory perspective I’d say that Aecon is about a million times more important than a random busted microcap gold miner 😛 . Also, consider me skeptical about a temporary travel ban derailing a strategic Chinese deal backed by all large shareholders of the acquired company.

      Might actually be an interesting long!

  2. The timeline has been extended and regulators will now make a decision on whether go for a national security review until the 19th October, while there is a possibility that the review might get extended until Feb’21 (post outside date of the merger agreement). So the closing of the merger is now delayed to Q4 with possible delays to 2021. Visitation condition is also under question – Canada’s travel restrictions will now last until the end of August and will likely get extended due to spikes of COVID in certain Canada regions, whereas things are expected to get only worse in Autumn.

    Spread has widened to 31%.

  3. Interesting: the CEO of Guyana Goldfields (GUY.TO, was an idea on this site) has just been appointed to the board of TMAC. Guyana just sold itself to Zijin Mining, another Chinese buyer. Did they bring him aboard to streamline the deal with the Chinese?

  4. Yeah giving this another look, this seems worth a shot at this spread. A gold miner especially of this size is hardly strategic. Also there were other bidders, and gold price is higher now. Supposedly EBITDA will be $120m in 2021. Although with their partial mine collapse in March that estimate might be outdated.


    This has political issues that is hard to predict. Shandong has been good at purchasing companies with reserves but companies with little capital. There is little risk from them.

    TMR has significant proven gold reserves, the issue is spending to get to it. Right now it costs ~$1k, that cost will likely go up. The deal still makes sense, it is really politics at this point, I hate to bet on that.

    • Thanks for sharing that.

      p.s.: unrelated, but man do I hate the WSJ paywall .. Why can’t I pay for a single article? Last time I became a member I had to actually CALL to cancel my membership. Had to manually change my location to California to be able to cancel my membership online, I guess they have some other laws there. Ridiculous. If you’re a bit of a techie I recommend this:

      • I got so carried away that I forgot to reply on-topic. Anyway, while I do think there’s a lot of posturing involved I might have been underestimating the political risk. Price might still be attractive but this could go wrong.

    • This article is not behind pay wall:

      Some reasons to not be as concerned:
      -Gold is not considered a strategic resource
      -Deal is relatively small
      -TMAC board probably considered this and like the odds (otherwise they would have gone with another bidder)
      -Scrutiny seems to be mainly over foreign interests taking advantage of shareholders due to Covid, which seems not to be a concern here since there were multiple other bidders
      -It is a small deal
      -We are right past elections
      -It will create investment in the area
      -cancelling deal could actually hurt TMAC shareholders more

      Big reason why it could fail:
      -Trudeau does want to get tougher on China, and this would be an easy way to do so

      • Also worth noting, that flooding issues in Doris mine, discovered in February 2020, caused the share price to collapse.
        So the Covid 19 madness started the first week of March, looking at it like that, the premium is rather small, but considering the plunge after the flooding news on March 6, the premium is much larger.

        Relevant snippet:
        “While conducting initial underground delineation diamond drilling in the Doris Central zone in 2020, TMAC encountered groundwater of a high enough pressure and flowrate to warrant suspension of development in this zone and re-evaluation of the development strategy. Geological structural modelling indicates there are several ways water may be entering the mine, including sub-vertical faults and/or historical surface diamond drill holes from Doris Lake. The size and extent of the water bearing structure relative to the orebody is not yet known. Grouting experts are preparing a test grouting program and the Company will perform further probing of the Doris Central zone, once the current inflow of water in this area is mitigated. As a result, development of the Doris Central mining zone is expected to be delayed by at least several months.

        TMAC had anticipated Doris Central to represent nearly 15% of its 2020 production, commencing in the second half of the year, and a significant portion of its 2021 production. There is a risk that Doris Central production in 2020 will be significantly less and that 2021 production from Doris Central may also be impacted. TMAC is evaluating opportunities to mitigate any production lost in Doris Central with other areas.”

      • Sorry for the spam, but thought this was worthwhile to add as well. I think part of the fear, is that China would a piece of land in the Arctic and could potentially use it for other purposes? But TMAC does not own the land, and it will revert back in 2035 (which is also when mine life will reach its end from presentation page 6). And it seems they would need permits to build anything that is not related to what they are currently doing. from annual report:

        “In 2015, TMAC entered into a Mineral Exploration Agreement (“MEA”) granting the Company access to the
        Inuit-owned subsurface mineral rights administered by Nunavut Tunngavik Inc. (“NTI”). TMAC also entered
        into a Framework Agreement (the “Framework Agreement”) and an Inuit Impact Benefits Agreement
        administered by the Kitikmeot Inuit Association (the “KIA”) for surface access rights on Inuit-owned lands
        at Hope Bay. Each of the MEA and Framework Agreement are for 20-year periods ending March 30, 2035.
        TMAC has all the required leases and claims for Federal-owned subsurface mineral rights.
        TMAC RESOURCES INC. Management’s Discussion and Analysis – December 31, 2019 23
        TMAC is in possession of all Federal and Territorial permits and approvals required for continued mining
        and gold production at Doris and for mining of the Madrid North, Madrid South and Boston deposits and
        development of all associated infrastructure and all-weather roads.
        The permits not only fully cover the development scenario described in the 2015 PFS, but also provide
        additional flexibility, including additional water use and processing and other infrastructure at Madrid and
        Boston, alternative wind power generation and additional tailings capacity. The permitting also includes
        surface crown pillar recovery similar in approach to what was executed at Doris and is being executed at
        Madrid. With regards to the scope of the 2020 PFS, the existing permits exceed the development scenario
        in many instances (i.e., process plant and tailings facility at Boston) but would need to be amended to
        accommodate any additional water use, infrastructure or activities not addressed during the water licence
        applications and environmental and socio-economic impact assessment submitted to the NWB and the
        Nunavut Impact Review Board, respectively, in December 2017. It is anticipated that an amendment
        process for existing permits would be achievable in reasonable timeframes given that all deposits have
        permits for significant infrastructure, mining activities, and freshwater use from local water sources.”

        So it looks like China is pretty restricted here in what they can do. And this fear:

        “Huebert writes, “The Chinese are currently also embarking on their Silk Road initiative by which they hope to expand Chinese control over a world-wide network of maritime trading locations. History has shown that this is how maritime powers such the UK and US have been able to establish themselves as world powers. In the long term, Canadian officials will need to watch if the Gold Mine leads to new infrastructure that leads to a port that will then be serviced by Chinese commercial traffic. This is where it then become complicated for Canada. How would you say no then? If the mine and new infrastructure have come to provide for prosperity for the region, what Canadian Government would be willing to put on restrictions?”

        Seems to be pretty unfounded?

      • Thanks for your thoughts. Yeah, I mostly agree. the TMAC buyout doesn’t seem like an actual security risk, but the risk is that it will be treated as a test case.

  6. Up 12% on no news so I sold off. With these smaller speculative merger situations I am always a bit hesitant to hold when it spikes up. Could be a more informed insider, or could simply be a random price spike up?

    Would be interesting to do a statistical analysis on this, how often these spikes are following by a drop, and how often it really is an indication of more informed insiders buying up all the shares they can.

    • Now 47% upside, seems like I got really lucky here. Stock seems to be down on discovery of several covid 19 cases. But so far they have done contact tracing and are proactive about it. They have 286 employees, so you wouldn’t think it would have a big impact if they can limit this to 10-15 or so cases. If this does get out of control, it makes the situation a lot more binary with the flooding problems they already had.

      • Agreed, this doesn’t make sense to me. Even if the cases get to be so bad that they have to shut down, I don’t think the Chinese buyer cares. They are buying the gold assets as a long term strategic asset. I don’t foresee this changing anything for the buyer.

      • Right, the real risk is the Canadian Gov’t blocking it, in my view. I’m long.

  7. What exactly happens if national security review is not completed by 8th of Feb’21? Is it clear that the deal falls through? Doesn’t seem like it to me if the buyer is truly motivated.

  8. Holding or buying at these prices a good idea? Any other interested buyers?

  9. Regulatory approval was clearly stated as the major risk here, due to the strategic location of TMAC properties. The prospect of more additional buyers is nonexistent at this point, while the future of the mine (the company’s ability to fund the needed investments) is quite uncertain at this point.

    The idea is closed with a 26% loss in 6 months.

  10. All things considered, downside risk wasn’t bad here. Stock is now trading at same price as it was before announcement.

  11. Why does this shoot up this much AFTER the merger breaks? That makes no sense. Is there a rumor I am missing?

  12. Looks like acquired by agnico eagle. Lucky turn for those that stayed in.

  13. Very lucky, I totally forgot about this position. Did I miss an email saying to close this out or something?

  14. Based on how it traded it looks like some people knew this was in the works?


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