Transcription
Hello and welcome back to Kiko Mining's digging deep with me Paul Harris, in which we take a closer look at some of the most interesting news items in the mining and the exploration space.
Today is Thursday the 30th of July, and the producer tells me that this is the 100th episode of digging deep. So, happy birthday to us. Joining me today to celebrate is Christopher Eckleston, principal and mining strategist at Hullgarten Plus Company. Chris, welcome back to KitKo.
>> Thank you.
>> Chris, uh, we are in celebratory mood. So, let's start with M&A. G Mining Ventures closed the acquisition of G2 Goldfields to combine their respective OODE gold deposits in Guyana. And G3 Goldfields was created from properties spun out from G2 Goldfields, and it will be funded with $45 million Canadian in cash. And it will get up to $200 million US of contingent payments tied to milestones at the properties that were acquired by G mining. Chris, what does the closing of this deal mean for G Mining and its aims to become a mid-tier producer to be reckoned with?
>> Well, I think we should go back into the bit of the history here. Um, they're they're a bit like amiebas, some of these companies, they divide and recombine. Uh, and I'm not sure where the value added is from doing this. Um, I know we've seen a few companies like um, originally u, was it Beamer Gold became B1 and B2 and all sorts of vitamins, and then we had um, Vision Uranium spawned in F2 and an F3. Um, and in this case, we're going for G1 and two and three. Um, and then G1 and G2, from what I can gather, it's a very confusing transaction, are recombining. Um, the question is, why? Um, uh, I don't know if uh, bankers are getting fees on this, on first doing the division and then doing the um, recombination. Um, but I suspect it's the company itself. Um, they're trying, is you know, I'm all for demergers. I I know you're not such a fan. I love demergers. Um, but demerging and then putting them back together again is sort of a bit of a zero-sum game. Uh, it involves a lot of costs, uh, and doesn't really bring um, benefits, uh, equivalent, I don't believe. Um, and indeed, you know, some of these demergers um, do create tax problems for some shareholders. Um, I know that some US shareholders, for instance, in some of these spinouts um, don't get the stock, they get cash instead or something, uh, like that. But, uh, so um, I don't know. I think there should be a bit more longer-term thought given, given to these um, these transactions if you're going to do this type of thing of going backtracking really on on your original um, rationale for um, for breaking up. Um, because if it's to set them free and then you don't really set them free but come back and uh, and corral them back into the into the nest at a future date, um, what is the point?
>> I think that's a very interesting argument you're making, Chris, because um, management often gives the rationale that they're spinning an asset out because its value isn't recognized in their their overall valuation or market capitalization. But then, as you suggest, at some point in the future, there may be a reabsorption when it seems, uh, okay, we need a pipeline. Now, another couple of great examples there are what Luminina Gold did with its assets in Ecuador. I think they spread out, came back together two or three times. And of course, market darling Njex Resources, if we go back what, 10 years or so, Njex pretty much had the whole of the Vikunia district. It span out Hosa Maria, it span out Felo, I think some bits came back um, but obviously they're doing very well on their own. Um, I'm not, as you mentioned, I'm not usually a fan of spinouts, as they, uh, more than often create another underfunded junior orphan in a sea of 2,000 other underfunded junior orphans. But this one is not underfunded, and it is run by a team with proven success in a jurisdiction where they have had that proven success. So, it seems that um, this is an M&A where everybody seems to have come out happy.
Chris,
>> Yeah, until they're not. [laughter] You know, we're we're in the tail end of a bull market here, so you can uh, you can still squeeze some juice out of the lemon. Um, but, uh, maybe they're they're doing this now while they're going is good. Um, because at some future date, maybe recombining these things, potentially at the loss, loss for some people. It's not like a zero-sum game where you've got um, all the shareholders of G1 become shareholders of G2 and then several years later, they recombine. So, it's all six of one, half a dozen of the other. Um, because in the meantime, both groups have seen shareholder base change as people sell and buy and do whatever. Um, I wonder whether some of these transactions are actually um, management driven, management trying to um, uh, how can I put this tactfully?
>> Keep a job, have a job. Uh, well, make more jobs, in fact. Um, you know, because they can replicate themselves like some sort of mutant um, and back to the amoeba analogy, um, the management actually mutate um, and they get themselves a whole lot of new stock in a, or options in a new vehicle um, and then ultimately, they control the value of uh, how they exit those new options if they end up buying back the company that they spun out in the first place and making an interesting deal to the option holders, which is largely them.
>> Chris, it sounds like your amoeba analogy should perhaps be a virus analogy.
>> Oh yeah. Well, that's the next step. [laughter]
>> Okay. Well, an M&A deal that's leaving no one happy is the $5.5 billion deal for Xian Gold to buy Allied Gold, which has been terminated this week after the parties concluded that there is no reasonable likelihood that it would be fulfilled by July the 29th, the deadline there. The deal was originally due to close in late April. Allied shares were down 15% on the news. Jin in January agreed to pay $44 Canadian per share for Allied, implying a 27% premium at the time. But Alli's price has since fallen below $30 per share as the gold price has come off, which would today have implied a premium of near 50%. The companies had got most of the regulatory approvals, but perhaps fell foul of the Chinese government intensifying its oversight of acquisitions across all sectors. Chris, um, was the falling gold price and therefore Allied's falling share price an nail in the coffin to this deal?
>> Yep. Yep. I think far more than the Chinese government, because Zin has been one of the Chinese government's um, darlings, and I don't know that they would have gone ahead with this transaction without consulting the higher-ups. Um, I just, I doubt that. So um, this is a case of a bull market deal, a tail end of the bull market deal um, that is having the carpet pulled out from underneath it by um, the uh, lacadasical gold price and the even worse situation of um, valuations of many gold miners. I mean, we've seen gold has gone down um, 20% from 5,000 to 4,000 um, but many of the gold miners, u, and gold, even worse, some of the others um, the smaller ones um, have gone down 40%. So um, if you can get out of the transaction um, without having to pay a break fee, yes, please. And then you can circle back at some future date uh, and do some other sort of deal. Break up, all maybe um, something like that. But, uh, [gasps] uh, I do not see this as um, uh, action by um, Beijing, beyond Beijing saying, "Well, maybe guys, you bid too much. So maybe you can get out of it and then um, go do some better deal u on some other beaten down minor or um, come back and uh, do a mercy, a mercy bid at some future date when Allied is way, way lower than it is uh, at the at the current time. I don't know. There's usually some sort of clause that doesn't allow you to uh, to come back after you've walked away. Um, but um, such clauses can be um, can go by the wayside if the shareholders are desperate enough um, to get a deal and they can't find anyone who's going to buy them.
>> Well, that's an interesting perspective, Chris, because as you mentioned, there was no break fee. In the original deal, there was a $220 million break fee, but um, with the Chinese government not approving it, it's neither the fault of Xihin nor of Allied. Um, however, Xihin has agreed to make a $295 million US strategic investment in Allied at a premium for a 9.2% stake. Chris, um, in light of what you've just said, do you think, do you view this as a perhaps a toehold for Xin that may result in a future offer for Allied, or just a face saver given that Allied cannot claim the break fee?
>> Time will tell. Time will tell how that will play out. Um, do they need a toehold? I don't know. They made a bid for it and then they've walked away from it. Um, maybe this is uh, some sort of cunning device that um, gets them a seat at the table. Seat at the board table. They're getting a board seat with this? I have not seen. Um, if I was them, I'd definitely want one.
>> Okay. That, I, I don't know. Um, but Chris, what lessons can investors learn from this? This deal was struck in January, let's say pretty much the top of the recent gold price cycle. Um, is the lesson here that it's perhaps better to take the share price bump after a deal is announced and leave a few points on the table than perhaps to try and let the the deal conclude and get the full valuation that was bid?
>> Yeah, absolutely. I I don't know why anyone would have hung on after that point, except uh, maybe thinking that there might be a higher counter bid coming somewhere. Um, but hope springs eternal in the breast of uh, gold bugs, and they always think that there's another party going to come in and pay an even higher price for something that is overpriced already. Um, and in this case um, I think the big lesson is um, well, the big lesson is sell as soon as you can. You know, take your money off the table, particularly as we sailed into um, the events of February the 28th. And the other lesson is that um, Donald Trump has been really bad for mining equity markets. May have been okay for the few sort of wonder stocks that um, that Jared and friends are involved in in the US markets, but for the general mining space that was having a rock and rolling time from mid last year until February the 28th. Um, the actions of of the Trump administration have been really bad for miners, really bad for most metals. I can only think of two metals, actually, you know, holding their ground. Um, that's tungsten and tin in the face of this. But the the treatment of of gold and silver has been brutal. Um, I mean, the treatment of the the underlying um, stocks has been even worse. Um, it's sort of like disastrous. Um, and you know, it's a pity because you know, we wait so long to get a big secular um, bull market in uh, in mining. And what's more, I think that the first months of this year started to show that there was um, a genuine rotation from big institutions into mining, and that has been knocked on the head by the events of February the 28th. And subsequent to that, we've ended up with um, you know, the rotation into mining ending, and the rotation being instead into data centers and AI. And, you know, those guys can go crying all the way to the bank, because um, you know, many of those transactions are now falling apart. Maybe um, mining will get a second win, but um, how many, you know, chances do you get to finally get institutions to regard mining as part of the real economy? And we were on the cusp of that. Um, and we were seeing valuations for the metals and for the stocks associated with those metals. And February the 28th has just been like dire.
>> There, there's an awful lot to unpack there, Chris. February 28th, that's when the US started its attacks on Iran and following that, the Strait of Hormuz was effectively closed. Um, you, you mentioned tungsten and tin have held up. You know, copper's held up. I was looking at the the copper futures at $6.45 per pound, they've held up pretty well. Um, but I take on board your point about precious metals cratering. Um, AI stocks have been starting to sell off because of the, uh, concern about the amount of money companies are borrowing to build out those data centers. So that's in line with your, your thesis of the the commodity investors starting to rotate into other things. And, yeah, I take on board your point about the the conflict in the Persian Gulf perhaps derailing mining's recovery. And if anything, that looks like it's only going to escalate. More, more parties, more countries in the region seem to be getting involved in in that conflict. Um, what's your view for how that is perhaps going to play out over the coming months?
>> Um, well, look, gold, gold has just sort of lost its fig leaf as um, you know, a a place of safe haven, uh, because things could not really be um, sort of worse, except if we had World War II start. And even, you know, some pundits are musing these are the first um, you know, swallows of of of World War II. Um, uh, but no one's hiding in gold. Um, and if anything um, the conflict has precipitated the large number of holders in the Middle East to offload their gold. So they were buying it as a safe haven, but now they're having to sell it because they're finding that their countries are not safe havens. Um, and that they've got to try and plug their budgets that are, are not seeing oil revenues coming in anymore. And they're also seeing uh, you know, some of these economies that were totally, have been totally devastated, most particularly Dubai's um, you know, it was the new Hong Kong, and now it's looking like the new um, Mogadishu um, you know, [laughter] and so the, so the the governments of the Emirates are having to toss everything overboard that is not tied down. And the gold holdings are, you know, the first ones to go. And they're selling these things off to buy US munitions, and the US can't even provide them with the munitions. So, um, I, it's, it's like it's not a scenario that um, anyone was looking for. It is quite fascinating, even though it is also quite scary. Um, gold has sold down from 5,000 to 4,000, as you mentioned, Chris, but still, that's let's roughly double what it was a year ago. So, gold is to a certain extent held up quite well, and it is maintaining itself above that $4,000 per ounce. Um, I want to use that as a stepping stone into the second quarter results, because um, a number of companies have reported results, by and large, continue to impress. Kimros Gold reported last night with record net earnings of $844 million US. It now has $2.7 billion of cash on its balance sheet. First Majestic Silver reported this morning, and it has joined the $1 billion cash balance club. Many companies have yet to report, but so far, more than $10 billion has been returned to shareholders this year in the form of dividends and share buybacks. Uh, Chris, as the financials are coming in, who is impressing you?
>> Um, you know, the thing I worry about most with these companies is that the next thing they're going to do is they're going to say, "Well, you know, we're looking backwards here. Those results were for when gold was 5,000 or was 4,500 on the way up, and now we're at 4,000. We need to tighten our belts and sit um, on this, these cash piles that we've got um, and and preserve them in case things get tougher." And that is good management strategy. But as we've seen with some of these um, big miners in the past, money burns a hole in their pocket, and they make bids using this cash that, uh, they shouldn't do. Um, Kim Ross, of course, was the poster boy for bad deals 10 over 10 years ago. Um, they seem to have learned their lesson there, so far. Um, but, uh, there are shareholders out there who um, you know, not necessarily retail shareholders, but these institutional people who who have the ear of the board, and they say, "Oh, you got to do a deal, you got to do a deal." No. I would say no. You don't have to do a deal. Um, it's not a good time necessarily for doing a deal unless what you're buying is, you know, totally bombed out. Totally bombed out is good. Um, but anything else? Um, you know, why pay a premium?
>> Okay. Um, I listened to the Kimos Gold conference call, and the analysts always ask about M&A in any gold producer conference call. It's M&A, M&A, M&A. Um, to your point about Kim Ross, it does seem that Paul Rollinsson has learned his lesson, because he was very adamant that Kim Ross has got enough on its plate, and he basically said, >> paraphrasing, you're out, interested. Um, you know, >> with some of, as you say, some of the share prices have come off 40%. So it does seem that there potentially is some bombed out stocks out there. But um, taking a different viewpoint on this, Chris, I recently wrote about Gold Co holding some gold billion on their balance sheet rather than billions of dollars in cash. Where do you stand on that issue?
>> Well, they've, if they'd held dollars, they wouldn't have lost anything. Uh, and they've held gold, and they've lost 20% of the value of that gold. Say no more.
>> Well, it depends if they bought it. Yeah. If they have bought it a year ago, they bought it. Yeah. But it seems to be a bit of a recent phenomenon rather than a long-term one. You know, buying gold is um, and putting it in the portfolio is actually like the old practice of hedging. And we remember what hedging pre-2000 was the demise of many um, many a company. It was not necessarily a bad strategy. And big miners had very good reasons to do that because they'd seen the swings and roundabouts of the um, the mining market, the metals markets, and saw hedging as a way to protect themselves. But um, you know, that was financial instruments, you know, selling things forward and futures and whatever. Um, but holding gold is also a form of hedging um, that um, can turn around and bite you on the behind. And I see it now as being something that is leaving teeth marks in the posteriors of quite a few companies that have indulged in that practice.
>> Fair enough. Let's turn to copper as the red metal continues to give. Futures, as I mentioned, are about $6.45 per pound today. Hud Bay posted strong second quarter earnings of $138 million with self-proclaimed industry-leading margins due to a C1 cash cost net of byproduct credited credits of negative 40 cents per pound. High gold prices combining with combining with high copper prices there. Meanwhile, dividend darling America Resources reported net income of more than $18 million US for the quarter and declared a 4 cents quarterly dividend plus a special 18 cents dividend. Chris, um, interesting this, why aren't we seeing more companies declaring bonus or special dividends given that, uh, metals prices are riding relatively high?
>> Uh, well, America has always um, uh, assued the um, the Bay Street myth that investors don't like dividends. Which is a total um, you know, falsehood, to put it bluntly. And, uh, so, you know, they're doing the right thing. Uh, and some of these other companies, you know, should not be indulging in uh, on-market buybacks of stock, but they should be paying out dividends to the shareholders. And then the shareholders can go and either buy more of the stock that they love, which is the stock that just paid them the dividend, or they could go and buy stock of something else that they feel is even more bombed out. Um, and, uh, ultimately, it's the shareholders' choice, not the management's choice to sit on an enormous pile of cash like an ostrich sitting on its egg. Um, because that egg is not necessarily going to hatch into anything if it's just a big pile of US dollars, or even worse, a big pile of gold.
>> Okay. So potentially more drip programs needed. That's dividend reinvestment programs. The picture is not so rosy for miners. A bit further north in central Chile, in the Atacama district, where massive rain and snowstorms have impacted operations at mines operated by Cadelo, Anglo-American, Antivastaster Minerals, and London Mining. Barrack Gold is, or sorry, Barrack Mining as well. Uh, Chris, while these closures are temporary, do you anticipate that they will have an impact on the copper market?
>> No. No, temporary. Totally temporary. I mean, it may be that the the Atacama Desert is the driest place on earth. Um, but it's, it seems to be getting um, surprisingly large amounts of rain and things in recent years um, that make putting the lie to that um, statistic. Um, so the the mining companies should maybe spend some money on on bracing themselves um, for uh, climate change um, impacting them rather than just their bottom line.
>> Absolutely. Staying with Cadelo, which is Chile's state-run copper company, it recently said the development of its Marikunga lithium joint venture project with Rio Tinto has been delayed by four years to 2034 due to what it calls slow permitting. Chris, a couple of things here. If Codelco, the state copper company, can't make Chile's permitting system run smoothly, who can?
>> I think it's a total fabrication. It's because they don't want to bring more production on at this stage. If the Chileans know anything about lithium, it's how to uh, massage the price. You know, the cartel um, that existed until maybe 10, 15 years ago um, you know, had Chile as one of its key props, and they do know that if you overproduce um, you come to grief. And Marikonga, I have been to visit, I know Marikonga very well, and it could be, there's no reason why it couldn't be built there, and there are no residents living around there, are no flamingos. Um, uh, the permitting is a a matter of choice. And I would say that, you know, Rio Tinto is saying, look, we've got all these assets over in Argentina, we've got assets elsewhere, you know, that they picked up from the Liva deal. No, we don't need to do anything more with this at this stage. And Codelco itself should not be involved in Marakonga um, if the Chilean government had wanted to uh, you know, start meddling in the lithium space, should have just come out and set up a a lithium entity in the same way that uh, Bolivia has and that Mexico has um, instead of disguising it under the umbrella of um, the world's largest, is it the world's largest copper company? It's a world's largest state-owned copper company um, that really knows zip about lithium um, so it should have been done in another way. Um, but I suspect it's, it's a bit of market timing that's going on here. Nothing to do with permitting.
>> Okay. I think the intention of the Gavil Borridge government was to create an independent state-owned lithium company, but they never got round to it, which is perhaps why Codelco assumed that particular mantle. Um, I was going to ask you, Chris, does this perhaps emphasize the the view that Codelco should not be in the lithium business? You've expressed that very clearly. But, uh, your initial comment about um, being able to massage the the lithium price, the lithium market, if Codelco is an active actor in one of the key development projects, presumably that would enable the government, you know, give the government greater ability to do that by not bringing it on stream as as quickly as perhaps it could be.
>> Yeah. Yeah. But, you know, Chile is not the axe anymore in um, in lithium. Sorry to tell them. [clears throat] The the um, the dominance has moved over to the much more prolific um, you know, Argentine um, projects, of which there are quite a bunch actually in production and coming into production that make Maronga look like a bit of a sideshow. Um, I think the Chileans are not wrong though. Because um, I, I have a dim view of the future for spodumene, and the Chileans um, if they sit on Marikonga long enough, will be able to turn it on at the phase when the price of lithium plunges, and the sp, the hard rock crowd are ultimately driven out of business. We've seen it happen in with the underground mines in Quebec. Because also, the old Namaskar um, property, Wabuchi um, in Quebec is in sort of like permanent um, deep freeze um, and there Rio Tinto is the partner as well. Um, so I think that they're looking for a scenario in which um, the price of lithium goes down, and then, you know, they'll be in a much stronger position. And a lot of these projects in Australia and these underground um, lithium proposals will sort of disappear. And then, you know, probably that's also grim news for um, for the mica and clay crowd in um, Nevada. Um, so, um, yeah, brine trumps everything. Pardon the pun.
>> Absolutely. Well, let's end with some real sort of positivity. London Gold's exploration team at Fruto del Norte in Ecuador continues to hit out the park with results from FDN south of 11.75 meters grading 109 grams per ton gold. Reports from Australia say the company is looking to pick up expand there to pick up the nearby Rio Zaza and Valley the de Inca mining concessions from Somerset Minerals. Um, Chris, um, London's Gold's performance as a as a mine has been amazing. The performance of its exploration team producing results like this in, uh, near mine and outside mine and regional drilling is absolutely incredible. This really is something else, isn't it?
>> Yeah, it really goes to show that Ecuador is, you know, the the new frontier of um, of gold. It's, it's but the irony is that Fran was in the freezer also for like 8 years because of the arbitrary actions of the um, the Ecuadorian government. And, you know, finally, uh, now this is getting going, and a few other projects that are getting going there, they'll start to see jobs because of course um, Ecuador suffered from the what's called the Dutch disease, that the oil industry was very sexy, and the mining industry was not. And, you know, wasn't producing jobs, but now it's starting to produce jobs. Mining should be something that won't end up um, you know, being a whipping boy in Ecuador in the way that it was during that dark period where, fut was just sort of like on the bottom shelf and unwanted and unloved. But now, um, doing well, doing well, a lot more to come in, I think in copper as well. So, um, you know, it's going, it's going to be really interesting.
>> Definitely. And London Gold gives us a chance to weave together a few of the themes we've been talking about this week, Chris. Um, its performance has been amazing, and the company's been very active and progressive in returning a lot of those, uh, those earnings to its shareholders. However, many investors ask and when London Gold will seek to leverage its cash pile and its highly valued stock into acquiring other assets. The pullback in valuations would seem to be a great time to do so. Um, if you were in the London camp, if you were running the company, what would you do?
>> Wait. We've not seen the worst yet.
>> There are more bargains.
>> More bargains out there. You know, some of these stocks were having lost 40% of their value, still too expensive. Um, yeah, there's more stuff out there that you can get cheaper. Just need to get let them get sort of like frogs more boiled in the boiling water, and then you have you have your frogs already cooked. [laughter]
>> Okay. Well, on that bombshell, Chris, that's all for this week. Christopher Eckleston, thank you very much for joining me.
>> Thank you very much.
>> And of course, if you like what you see, don't forget to hit that subscribe button. I'm Paul Harris, digging deep for Kitco Mining.
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