3 Takeout Targets Among Gold Miners With Low Valuations And Huge Projects

Includes: CHPGF, NG, PVG
by: Ben Kramer-Miller

In this article I discuss three junior gold mining companies with small market capitalizations but enormous projects. While these projects will potentially be extremely profitable, their owners simply do not have the means to develop them without raising capital that exceeds their market capitalizations. This has led to incredible damage to their respective share prices, which has made them uniquely appealing.

There are several options available to these companies such as issuing stock, selling forward production through royalty agreements, or even finding JV partners. However with large gold miners in need of expansion projects I suspect that these larger companies will consider purchasing the companies discussed here at a premium to their current valuations, as the bulk of the cost to the acquirer will be development costs.

I chose these three companies in particular because they have features that indicate to me that their assets would be more valuable in the hands of a large company with current production and assets at their disposal. Note that none of these companies has revenues, and they will not for several years, and this makes them speculative.

1: Pretium Resources

Pretium Resources (NYSE:PVG) has been in the news recently given market skepticism regarding the feasibility of its Brucejack project. However more recently bulls seem to have been vindicated, although the share price is still depressed.

Pretium has two projects. Brucejack is expected to produce in excess of 300,000 ounces of gold annually with relatively low costs of roughly $600/ounce. In order to develop this project the company needs just over $400 million. While it has raised some of this capital recently by selling a royalty to Franco Nevada (NYSE:FNV) this is still a large capital burden for a company with a market capitalization of just over $600 million.

However the company's largest project, Snowfield, will require a whopping $3.5 billion, although it will produce 600,000 ounces of gold annually with costs of $1,100/ounce. This is an enormous burden despite the possibility that higher gold prices will enable the company to fund this development using cash-flow from Brucejack.

If the company chooses to develop Snowfield using cash-flow from Brucejack it could be many years before there is any production at Snowfield. If, on the other hand, a large gold miner buys the company out it would be able to develop both projects simultaneously, or potentially spin off Brucejack as a separate company and focus on the much larger Snowfield. The fact that a larger company would have these options makes Pretium more valuable to an acquirer than it stands as an independent company, which makes it a solid take-out target.

2: Chesapeake Gold

Chesapeake Gold (OTCQX:CHPGF) has a valuation of just $125 million, but it owns one of the largest undeveloped mines in the world: the Metates property in Mexico. It has over 18 million ounces of gold and more than half a billion ounces of silver. Furthermore for the mine's first 15 years of life it will produce at least a million gold equivalent ounces annually at roughly $800/ounce.

The reason the stock is so inexpensive is the high development cost for Metates of over $4 billion. Given the company's current valuation offering this much stock would devastate shareholders. While the company might be able to find funding through a royalty agreement or through debt issuance there is little possibility that it will even come close to raising this much. This makes it an ideal takeover candidate for larger gold mining companies that have the means to foot this enormous bill: there isn't much competition as most miners cannot afford this enormous price tag, yet the buyer will secure a million ounces of low-cost production for over a decade.

From an investment standpoint the shares are incredibly appealing given not just the size of the property or the company's $40 million cash position, but because as a takeover candidate it would not be much of a stretch to see an acquirer pay a 50% premium or more without significantly increasing its overall costs (the cost of the acquisition plus the cost of development).

3: NovaGold Resources

With NovaGold Resources (NYSEMKT:NG) I have a particular acquirer in mind: Barrick Gold (NYSE:ABX). The two companies each own half of the Donlin project that is projected to produce in excess of 1 million ounces of gold annually for over 20 years at just over $1,000/ounce. This figure is 1.5 million ounces for the first five years of the mine's life.

NovaGold is not in a position to finance its $3.3 billion share of Donlin's development with just over $200 million in cash and a stake in the Galore Creek mine that it intends to sell to fund this development. Ultimately it is going to have to find some way to raise the capital it needs. Furthermore, I suspect that the mine is not going to go into production for several years - not until 2019. In fact I have argued that given the extended wait and the high capital costs relative to the company's $740 million (then $1 billion) valuation that investors should find other opportunities. However for just these reasons the company might be more valuable to an acquirer, especially if it has the means to finance over $3 billion in development costs.

An acquirer, if it is a large gold miner with several properties it doesn't have to worry so much about the long wait because it can generate cash-flow from these other properties. Barrick is the obvious candidate given its 50% stake in Donlin, but another company that has intermediate-term expansion plans but which would benefit from a longer-term project such as Goldcorp (NYSE:GG) might also consider picking up NovaGold.

Disclosure: I am long GG. 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.