Takeover Targets: Anaconda Mining and two steps to success
Earlier in this series we looked at Integra Gold Corp, which became a takeover target when the market failed to price in meaningful information already in the public domain. It was reasonably easy to call for a short term movement in the share price as that information was absorbed.
We also looked at GTA Resources and Mining Inc., which became a target due to the general indifference in the junior mining space, trading for roughly cash value and ignoring the independently-verified resources in the ground. Again, the short term movement upwards in the share price was not surprising.
This article looks at a company that I think intends to first beef itself up and then aim for a takeout premium for its shareholders. Again, movement in the share price will not be surprising, but this will likely be a more medium-term movement.
Anaconda has been producing gold from Pine Cove in the Baie Verte District in Newfoundland since 2010. For the six months ended November 30, 2014, the company generated $10,309,791 in revenue at an average sales price of $1,400 per ounce. Ore grade fell when compared with the same period in the prior year.
Cash on hand is about $1.3M. With roughly 180M shares outstanding, the market cap at five cents a share is roughly $9M. Subtract the cash, and the market is telling us Anaconda’s projects are worth about $7.5M.
This for a company that has generated $74M in revenue over the past three and a half years, has paid off its debt to leave it virtually debt-free, owns its own local mill, and is getting more efficient at managing that mill (see the metrics in the Jan 9/15 press release).
Geologically, the Ming’s Bight Peninsula hasn’t produced a mammoth find like Eskay Creek in north British Columbia or Chuquicamata in Chile. Pine Cove won’t be that, either. It’s likely Anaconda’s drill bit will continue to find the same as it has already found, hitting solid singles and doubles but no home runs, so exorbitant value creation won’t come from the drill bit. Pine Cove alone isn’t impactful enough to justify any major or intermediate company taking a run at Anaconda.
That’s where things are today. As an investor you want to make an informed decision as to what happens next.
Given what Anaconda’s leadership team has done over the past few years, I have to assume they clearly see their challenges. No dilettantes here – putting a mine into operation while paying off debt is an astoundingly difficult achievement, especially when the all-in cash costs are as high as they are at Pine Cove. They also had to deal with their messy iron ore projects in Chile, so let’s give management credit for business intelligence. They have built a solid platform for expansion.
How does a small company like Anaconda create shareholder value and make itself more attractive as a takeout candidate? My proposal requires a two step process.
The first step would be to get bigger locally: leverage the team’s specialized local knowledge on the Ming’s Bight Peninsula into other mineral resources / reserves. This should then increase throughput at Anaconda’s mill to increase revenue and decrease all-in cash costs.
As the substantive goals at step one are being achieved, a parallel second step would see the board re-brand the company from being seen as a single asset producer to being seen as a risk-mitigated district scale opportunity. In other words, use the current solid platform to make the market give Anaconda a premium as the then-dominant regional player.
The company’s corporate presentation dated Dec/14 (available at Anaconda’s website) gives some support for this theory. The presentation understandably spends a fair bit of time on bread-and-butter issues at Pine Cove, but pages 13 to 20 look at local exploration and development. Stog’er Tight, Romeo and Juliet, Dove Cove and Goldenville are all referred to as exploration targets that are proximate to Pine Cove. A fair bit of detail is available on them in Anaconda’s core and non-core disclosure documents.
The presentation shows the Baie Verte District sitting between two large fault lines (Baie Verte and Red Indian). Secondary lines branch off from the large lines. These main and secondary lines, and the areas around them, are highly prospective for gold mineralization. Stog’er Tight, Romeo and Juliet, Dove Cove and Goldenville fall in those areas.
In January, 2015, Anaconda announced a new gold find in the “Argyle Zone” in the Scrape Trend, only five kilometres from the Pine Cove mill. Among the results were 3.75 grams per tonne gold over 16 metres (including 8.27 g/t gold over 4 metres) and 1.49 g/t gold over 3.5 metres, in trench A8.
The trenching numbers are nice but the quotation from CEO Dustin Angelo is more revealing: “The Argyle zone demonstrates the fact that more gold can be found within striking distance of our mill. The discovery not only can be added to our pipeline of projects to help grow Pine Cove, but it also gives us the confidence that there is more gold to be discovered close by.”
Some further evidence of the re-branding part of my theory is that in Nov/14 Anaconda took a balance sheet impairment of roughly $2.2M related to its iron ore projects in Chile. The local owner appeared unable to make royalty, sales price and milestone payments to Anaconda. (In fairness to Anaconda, that’s seems to be like every iron ore story out there right now). The market had already valued those assets at $0 – this write-down was an IFRS recognition of reality. While painful, the write-down helped clear the way for Anaconda to stay on message and articulate a Newfoundland-focussed business strategy.
Step one– grow bigger locally. The growth plan as described above would be entirely organic, but I could see Anaconda being an opportunistic buyer if a local privately-owned asset were to become available at decent pricing. This would be an efficient way to leverage the team’s specialized local knowledge.
The re-branding strategy can roll out as assay results roll in. How Anaconda communicates with the market will be an important driver of shareholder value. A re-branding takes time and capital, but when done correctly it can set up the company for takeout at a premium.
Mr. Clausi is an experienced investment banker, executive, director and shareholder activist. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, ... <Read more about Peter Clausi>