Current Price: C$1.54
Offer Price: C$1.75
Expected Closing: Q3 2020
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).
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.
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.