Note: This article was originally published to subscribers on November 2, 2020.

Gold M&A activity is heating up as mid-tier gold miner Yamana Gold (AUY) has agreed to buy gold developer Monarch Gold (OTCQX:MRQRF) for a total consideration of C$200 million, or C$.63 per share, representing a 43% premium to Monarch stock price as of closing on last Friday, October 30.

In connection with the takeover, Monarch will spin out other assets into a new company with a cash balance of C$14 million.

Following completion of the spin-out, each Monarch share will be exchanged for the following:

  1. C$0.192 in cash from Yamana;
  2. 0.0376 of a Yamana share (a value of C$0.288 based on the volume weighted average price of the Yamana shares on the TSX for the 20 trading days ending on October 30, 2020);
  3. 0.20 of a SpinCo share (with each full share having a value of C$0.75 per share).

I believe Yamana Gold is getting a quality junior with an economical gold project in a top mining jurisdiction, and at a very good price, as it values Monarch at C$200 million versus its fair value, which I feel is at least 50% higher based on its strong feasibility study results. I would not be surprised to see competing offers come in, as I argue below.

Deal Analysis

(Monarch’s Wasamac property is in a great location in the Abitibi region, close to several producing mines and mills. Image Credit: Monarch Gold)

The deal will see Yamana take control of Monarch’s Wasamac gold underground project, which is located 15 kilometers west of Rouyn-Noranda in the Abitibi region of Quebec, 100 kilometers from Yamana’s 50%-owned Canadian Malartic mine.

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Wasamac is a feasibility-stage project that contains 1.8 million ounces of gold reserves at 2.56 g/t; it carries similarities to Agnico Eagle’s (AEM) Goldex mine (140,884ozAu produced in 2019) and Alamos Gold’s (AGI) Young-Davidson mine (188,000ozAu produced last year).

The feasibility study forecasts average annual production of 142,000 ounces of gold for 11 years at a cash cost of US$550 per ounce and all-in sustaining costs of $630/oz. It carries a pre-tax value of C$1.58 billion (US$1.19 billion) when using spot gold prices and a 5% discount.

On a post-tax basis, using a conservative gold price of US$1,300/oz, the project has an NPV of US$311.50 million, and that figure is north of US$800 million using spot gold prices.

According to feasibility study estimates, the mine cost $464 million to build, but Monarch has estimated that it can shave $230 million off by custom milling.

Wasamac has gold reserves of 1.8 million ounces, so Yamana is paying $71 per ounce for mineral reserves and $44 per ounce for mineral resources, not including the value of Monarch’s wholly owned Camflo mill, which can process 1,600 tonnes per day.

The $44 per ounce figure is lower than that of peers Bonterra Resources (BONXF) ($58/oz), Probe Metals (PROBF) ($63/oz) and Marathon Gold (MGDPF) ($112/oz), according to Monarch’s corporate presentation. (Past valuations of takeovers have ranged from US$50 to US$182 per ounce, with an average of about US$95 per ounce.)

The resource base includes 2.6 million ounces of gold (inclusive of reserves) at 2.70 g/t, and it is open for expansion at depth. The current mine workings only extend to 900-meter depth, compared to an average of 1,567 meters from other Abitibi mines, so there’s potential to expand the resource at depth.

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My thoughts

Yamana Gold is the clear winner from this takeover, as it is getting a quality asset at a bargain price, paying $44 per gold ounce (resource) and less than .20X NAV (using feasibility study estimate, on a post-tax basis, and spot gold prices).

However, I would not be surprised to see competing bids emerge, potentially from another mining company that is already a shareholder of Monarch. Its largest shareholders include Alamos Gold, which has a 16% stake in the company; Hecla Mining (HL) owns 4% and Agnico Eagle owns 3%.

This deal requires at least 66 2/3 approval from Monarch shareholders at a special meeting in late-December. “Certain larger shareholders of Monarch have also entered into support agreements and together with shares already owned or held by Yamana, approximately 28% of Monarch’s issued and outstanding shares would be voted in support of the Transaction.”

It will be interesting to see what happens and if we see another situation like Cardinal Resources (OTC:CRDNF), which received competing bids from Shandong Gold (SDGMF) and Nordgold, driving its stock price up 317% year-to-date.

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Disclosure: I am/we are long AUY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.