"[The road to] Hell is paved with good intentions" (Samuel Johnson)
Many of us, who are both speculators as well as investors, have hopeful and good intentions when we buy any investment that we estimate to be grossly undervalued. Our intention is to see that investment correct buoyantly to the upside with an "equal and opposite reaction". Sometimes it works out well for us and sometimes it doesn't. Right now there are solid and reputable companies "on sale", for many of which a possibility exists for that "equal and opposite reaction" to become a reality.
For example, with the price of precious metals and energy prices slumping along with the stock market and the Euro in correction mode on Wednesday, Dec.28th, 2011, opportunity knocked again. Volume is low in this intra-holiday period, and there appears to be both some profit-taking as well as some tax-loss selling. In Wednesday's precious metal markets we saw gold fall below a 3-month low at around $1,553. Silver has dropped 5%, and as I write, is resting around the $26.85.
The next technical support level for gold is around $1,500 and for silver it would be the January 2011 lows close to $26-per-ounce. Silver is almost there!Some of the So vereign Wealth Funds, especially those exposed to the European financial fiasco, may be liquidating some positions to raise cash before year's end.
All these factors are contributing to the remarkable correction in the basic materials sector, and that affords investors with a keen eye a chance to buy good companies at very discounted prices. It also allows the shares of the companies' stocks to fall to bargain-basement, near 52-week lows, and that causes some of them to hit the "radar screen" of larger, cash-rich companies that are looking to acquire well-situated smaller companies.
Some Possible "Acquisition" Examples from both Past and the Present
In just the past year we've seen some major gold miners like Newmont Mining (NEM) pay a 40% premium to acquire Fronier Gold. And the premiums seemed to get richer as the year progressed.
In August 2011, AuRico Gold (AUQ) offered to buy Northgate Minerals for a 62% premium. By the way, I noticed this morning that AUQ, which is trading at a little more than 6 times next year's earnings, is trading near its 52-week low. AuRico Gold is a compelling story with valuable properties and mineral rights, selling for a little more than book value with manageable debt and sitting on $148 million in cash. It could be easily construed as a take-over candidate in the near future.
In September, Agnico-Eagle Mines (AEM) offered to buy Grayd Resources for $229 million. The offer was a 66% premium to Grayd's 20-day average share price. The deal is virtually completed as of the date of this article.
Just imagine, from March to June of 2011, there were $20 billion worth of gold mining takeovers. Can you imagine what may be coming in the silver mining and energy production sub-sectors.
The only thing better than owning a company that's about to be acquired is owning a very small company shortly after it's debut and holding it long enough for it to rocket to dizzying heights. I'm referring to such astronomical payoffs like Aurelian Resources. This tiny company gained 16,150% from 2003 to 2008 when it was acquired. That kind of gain turns every $10,000 invested into more than $1.625 million. Yes, it is a very rare occurrence, but it does happen.
I personally experienced this kind of good fortune in a small silver-mining exploration company called Canplats Resources, which had the financial backing of one of the legendary names in the silver-mining industry. Those of us who were fortunate enough to buy into Canplats within the first year of its existence experienced a phenomenal 12,650% gain if we'd held it the entire seven years before it too was taken over.
Today There are ManyTakeover Targets Sitting Near Their 52-week Lows
Though it's not very likely for any of us to find the next Aurelian Resources or Canplats, we can spot some companies that may experience anywhere from a 50% spike to a 400% upside if they booked some unexpected results and were acquired. One such company which I alluded to in an earlier article is worth mentioning again. It is ATAC Resources (ATADF.PK). Its web site is a "goldmine" of information on how a small company can suddenly become a much more valuable one.
ATAC is a Yukon-focused company, with some projects in Idaho (another region that I like due to my interest in Hecla Mining's [HL] "Lucky Friday" operation there). According to the skilled analysts at Casey Research it’s the flagship Rackla Gold Project that’s really putting ATAC on the map. "There’s a new NI43-101-compliant resource on the Tiger Zone, but it’s the discovery of Carlin-style mineralization that’s really got the market’s attention" according to Casey Research.
ATAC remains a highly speculative play, but one with terrific upside potential and solid management. Robert C. Carne is the company’s president and a director. He’s a professional geologist with almost 40 years of Yukon exploration experience. From 1981 to 2002, he was a principal at Archer, Cathro and Associates (1981) Ltd. Mr. Carne has a great industry reputation, plus the experience of being with a highly respected geological consulting company active in the Yukon for the past four decades.
Graham Downs is ATAC’s chief executive. He’s also associated with the Archer and Cathro organization and has 15 years of experience in the mineral industry.
ATAC management holds 6% of the company’s stock. Not an impressive position, but apparently they have a significant amount of "skin in the game" along with other shareholders.W hen it comes to the current price-per-share I think this a great entry point. There has been an influential amount of tax-loss selling in the past month, so shares have gotten quite a bit cheaper.
I did very well (profiting nearly 400%) by buying ATAC in its earliest stages and waiting patiently. Just recently I re-entered, and bought shares of ATADF.PK at U.S.$2.40 per share.
Do your own careful due diligence before buying this speculative stock, and if you do buy, consider a gradual accumulation strategy such as "dollar-cost averaging".
Another gold-oriented company that I own, and have seen its shares plummet since I first purchased it is Seabridge Gold (SA). The company hit a fresh, new 52-week low of $15.58 per share on heavier than normal volume.
As its own web site states:
"Seabridge Gold’s resource base of gold, copper and silver is one of the world’s largest [highlights added by me]."
"Our principal projects are located in Canada. Our objective is to grow resource and reserve ownership per share. Our risk-reducing strategy: acquire North American deposits; expand them through exploration; move them to reserves through engineering; and sell or joint venture them to established producers for mine construction and operation."
The potential acquirer may be a bigger company like Goldcorp (GG) or Barrick (ABX). Or perhaps a mid-tier company like Kinross Gold (KGC) may step in soon and buy SA at a nicely discounted share price. It's been a "falling knife" as the 3-month chart painfully illustrates, so take heed. SA is close to the bottom of the lower Bollinger Bands. As you can see from the 3-month chart, the price tends to reverse to the upside after touching that bottom.
Speaking of Kinross Gold, it hit a new 52-week low share-price of $11.10 on Wednesday Dec.28th as well. KGC is now trading at less than 9 times forward earnings. It trades below its book value and has total cash (most-recent-quarter) of $1.88 billion dollars.
Last, but definitely not least, is a company that is a member of the hallowed "Dow Jones Industrial Average" stock index. I refer to none other than Alcoa, Inc. (AA). With a market capitalization of only U.S. $9 billion and a depressing $9.3 billion dollars in debt, AA presents both an interesting challenge and dilemma to any potential acquirer.
Founded in 1888 and headquartered in New York, New York, Alcoa, Inc. engages in the production and management of aluminum, fabricated aluminum, and alumina. The company operates in four segments: Alumina, Primary Metals, Flat-Rolled Products, and Engineered Products and Solutions.
If and when the European financial mess is resolved, or even partially "fixed", the perception that industrial growth may make a comeback could lead to companies like Alcoa rebounding higher. With a 12 cent per share dividend (and with $1.34 billion in cash to maintain it) investors who were to buy now at around $8.54 a share would have a yield-to-price of 1.4%.
A potential acquirer, knowing that the stock has traded as high as $18.47 within the past 52-weeks, and discovering that the stock has an estimated book value of nearly $13.50 per share, may swoop in and take it over. Another possibility is an "Activist Billionaire" (like a Carl Icahn or Warren Buffett) or a group of activist investors (aka a hedge fund or an institutional investor) may suddenly buy a controlling interest in the company and seek to make some major, positive changes.
We might also see is an international company like Aluminum Corp. of China (ACH) buying a controlling interest or attempt a direct takeover.
ACH is a force to be reckoned with. One of its big problems is the fact that the stock is trading near its 52-week low price, which may spell yet another opportunity for investors.
Time and content restraints limits a fuller discussion of other great companies that are at or near their 52-week lows that arguably could be considered acquisition targets. Among them are Chesapeake Energy (CHK) , Potash Corp. (POT) and even Vale S.A.(VALE), which could itself be considered a possible acquirer of Alcoa. Vale is selling for a super-low 5 times current and forward earnings.
Great investment opportunities can come "disguised" during stressful times of emotional over-reaction, or when high-frequency trading programs and low volume distort the true value of a company's share price.
May your research skills, judgment and results be as good as your intentions, and may the new year ahead bring you many rewards and most of all--good health and peace.