It was a tough week within the Gold Juniors Index (GDXJ), and Otis Gold (OTCPK:OGLDF) was not spared both, regardless of being the first acquisition within the junior gold house for 2020. We obtained information on Monday that Excellon Sources (OTCPK:EXLLF) could be stepping in to purchase Otis Gold for US$17 million, at a price ticket of $15.12/ozfor the corporate’s Kilgore and Oakley deposits in Idaho. The value paid per ounce on this deal was nicely beneath the 5-period shifting common paid for gold juniors, which was at $85.73 following the Continental Gold (OTCQX:CGOOF) acquisition by Zijin Mining (OTCPK:ZIJMF). This implies that regardless of a a lot increased gold (GLD) value, gold juniors are nonetheless not getting the respect they deserve from suitors when being acquired. This isn’t excellent for buyers hoping for enormous premiums and means that there isn’t any motive to overpay for improvement stage juniors above the $60.00/ozlevel.
(Supply: Otis Gold Firm Presentation)
Final week ought to have been an thrilling one for buyers within the junior gold house, as we obtained the primary whiff of suitors getting an itch to make acquisitions within the space. Usually, when the sector sees M&A exercise, the gold juniors reply fairly favorably, as buyers shortly place their bets on who could be subsequent. Sadly, this wasn’t the case final week, as Otis Gold was picked up by Excellon Sources at an enterprise worth per ounce that was lower than 20% common paid for the previous 5 takeovers within the house ($85.73/oz). Based mostly on Otis Gold’s 1.12 million-ounce gold useful resource in Idaho and a $17 million takeover provide, Otis Gold was valued at solely $15.12/oz. It is a large deviation from the $93.19/oz paid for Continental Gold, and the $61.19 paid for Barkerville Gold Mines (OTCPK:BGMZF), regardless of a gold value that’s greater than $150/ozhigher. Let’s take a more in-depth have a look at the deal beneath:
(Supply: Otis Gold Firm Presentation)
Excellon Sources is primarily a silver producer, so the deal in itself is unusual, with the corporate coming in to snap up a gold explorer. The deal is much more complicated as the corporate needed to tackle extra debt to get the deal completed, with a $6 million bridge-loan credit facility at a fee of 10% each year. Whereas this may seem to be a modest mortgage for a silver producer, it isn’t a clever transfer for a corporation that’s producing silver at costs above the spot price and posted a net loss of $8.89 million for the primary 9 months of 2019. Subsequently, whereas buyers might argue that Excellon Sources stole Otis Gold at a value per ounce paid of $15.12/oz, there isn’t any clear path to how this deal is accretive to Excellon Sources. This implies Excellon Sources doesn’t have ample capital accessible to fund placing Otis Gold’s Kilgore deposit into manufacturing, that means the challenge has little worth to the corporate at the moment apart from one other cash-burning asset. This complicated transaction is one other story in itself, however let’s circle to how this pertains to the junior mining sector.
As we are able to see from the chart beneath, the 5-period shifting common enterprise worth per ounce paid for junior miners has made little to no progress since 2016, evidenced by the blue bars beneath. Whereas the worth of gold has risen from $1,200/ozon this interval to over $1,600/oz, we now have seen no actual sustained improve in what suitors are keen to pay for gold initiatives, particularly after the Otis Gold acquisition. If we have a look at the chart beneath, we are able to see that the worth paid for juniors peaked in mid-2017 following the Integra Gold acquisition by Eldorado Gold (EGO) at a price ticket of $138.13/oz. This deal pushed the 5-period shifting common as much as $94.17/oz, a way more affordable price ticket for gold within the floor, provided that the gold value is buying and selling practically 1500% increased. Since then, nonetheless, the worth paid for juniors has been trending decrease with minimal enchancment.
(Supply: Creator’s Chart)
We did see a glimmer of hope prior to now two acquisitions, with Barkerville Gold being acquired for $61.19/oz, and Continental Gold acquired for $93.19/oz. Nevertheless, the Otis Gold acquisition has put an enormous dent in any progress made. Because the chart above exhibits, the 5-period shifting common of enterprise worth per ounce paid for juniors has plunged from $85.73/ozto $61.33/ozafter only one acquisition. Based mostly on the place gold juniors are at the moment buying and selling, it’s trying like this pattern will proceed, as a lot of the extra enticing takeover targets proceed to commerce nicely beneath this $61.33/ozlevel. Subsequently, for buyers eager for the times of 2010 and 2011, once we noticed 30% to 50% premiums handed out among the many sector, we’re clearly too early within the cycle to count on offers to be closing at phrases which might be this favorable. There’s a minor caveat, nonetheless, and it lies in the truth that Otis Gold isn’t what I might think about a Tier-1 explorer. Let’s take a more in-depth look beneath:
(Supply: Firm Presentation)
(Supply: Oakley Deposit Technical Report)
If we have a look at the above desk, we are able to see that Otis Gold had a useful resource of 961,00Zero ounces at its Kilgore deposit, at a really low grade of 0.55 grams per tonne gold on a weighted common foundation. If we add within the firm’s 163,00Zero ounces at their Oakley deposit in Idaho, we provide you with a complete of 1.12 million ounces, which make up the corporate’s complete gold useful resource. This world gold useful resource of 1.12 million ounces doesn’t evaluate favorably in any respect to the median useful resource measurement of previous acquisitions of 4.40 million ounces, and the common useful resource measurement of 4.98 million ounces.
(Supply: Creator’s Desk & Information)
As we are able to see within the desk above, Otis Gold’s common weighted grade for its ounces is available in at 0.55 grams per tonne gold, and that is greater than 60% beneath the median gold grade of 1.90 grams per tonne gold in previous acquisitions from 2016 by way of 2019. Lastly, the corporate’s projected all-in sustaining prices are $832/ozbased on the Preliminary Financial Evaluation, practically 10% above the median of $767.50/ozfor projected prices for previous takeovers. Subsequently, we are able to actually make an argument that Otis Gold is inferior to this peer group, and we are able to conclude that the enterprise worth per ounce ought to have are available in at half of the median paid, which was $63.79/ozfrom 2016 by way of to 2019. Nevertheless, the worth paid within the Otis Gold acquisition was one-fourth of the $63.79/ozmedian, not half, and this means that gold juniors are usually not getting a lot of a premium in any respect for his or her ounces.
(Supply: Creator’s Desk & Information)
Some buyers will argue that these juniors ought to command an enterprise worth of $100/ozor increased in a takeover state of affairs, and I might argue that that is true. Nevertheless, what ought to be occurring and what’s occurring are two various things, and it is sensible to commerce primarily based on what’s the present actuality, not primarily based on what we really feel ought to be the fact. Subsequently, the takeaway right here is that it’s irresponsible to be shopping for gold explorers at above $60/ozand hoping to earn money persistently. If the median value paid per ounce over the previous fourteen acquisitions is just $63.79/ozand has now dropped to $60.55/ozfollowing the Otis Gold acquisition, it’s a lot increased danger as an investor to be paying greater than this determine.
Traders might additionally make the argument that the Otis Gold acquisition should not have any bearing on the above averages because the peer group is clearly superior to Otis Gold in most classes by way of their challenge high quality. This level has some advantage, nevertheless it as soon as once more doesn’t change the info of the sector at the moment. Because it stands, we now have Marathon Gold (OTCQX:MGDPF) valued at lower than $40/oz, we now have Gold Normal Ventures valued at lower than $50/oz, and we now have many different takeover targets valued at lower than $50/oz. Subsequently, one might argue that Otis Gold acquisition or not, it’s extremely unlikely that we’re going to see the worth paid per ounce pattern increased. It is because most takeover targets as an entire are buying and selling greater than 30% beneath what was paid for Barkerville Gold in August and Continental Gold in December.
There could also be some distinctive initiatives on the market within the junior mining house, however as I identified in December, it’s hazardous to pay greater than $60/ozfor gold explorers. The initiatives could also be value $100/oz, they might be world-class, however suitors nor the market is keen to worth them this excessive. Essentially the most recent example of this was Wallbridge Mining (OTC:WLBMF) trading at over $150/oz, and I famous in my most recent article that the inventory was prone to bear a 30% plus correction to mean-revert from this valuation extra. As of Friday’s lows, that is precisely what we have seen, with the inventory down 39% from its highs.
The takeaway from this text ought to be easy; don’t overpay for initiatives, and the $60.00/ozfigure is what ought to be thought-about overvalued. Whereas some initiatives could also be acquired above this determine if they’re excessive anomalies like Mariana Sources (OTC:MRLDF), it’s irresponsible to count on this from the common takeover. Subsequently, for buyers within the house, shopping for alternatives are on the market, however the harsh actuality is {that a} increased gold value isn’t resulting in increased premiums. Based mostly on this, buyers ought to be doing their math forward of time when making purchases within the sector, and sticking to the undervalued and confirmed initiatives in the very best jurisdictions. At present, probably the most enticing identify within the house continues to be Marathon Gold at an enterprise worth of $38.50/oz.
Disclosure: I’m/we’re lengthy GLD, MGDPF. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
