Takeover fever and takeover fear take hold .. and Wall St banks say buy gold

28th March 2018
Tim Treadgold

Takeover time in the mining sector gathered pace in the shortened pre-Easter week when OZ Minerals launched a bid for copper explorer Avanco -- prompting a sell-off in OZ shares and serving as a warning for investors to watch out for over-eager managers.

The cash and shares offer from OZ is small beer in the overall mining market and while it helped double the Avanco share price from 8c to 16c it rubbed 20c off OZ’s share pric, which closed yesterday at $9.

The problem with some mining mergers was flagged last month by one of the world’s top investment managers, Evy Hambro, co-head of the BlackRock Natural Resources Fund.

In a telling section of his annual results report, Hambro said investors were “at the mercy of management teams” who could lose discipline and revert to their bad old ways of value destruction.

OZ management would argue that its agreed merger with Avanco will create value in the long run, but right now it can be seen that OZ shareholders are worse off as investors follow the old maxim of buying the target and selling the bidder.

Whether OZ is at the start of a new wave of mergers and acquisitions will be interesting to watch because there are a number of cashed-up miners looking for growth options after two years of rising commodity prices.

Interestingly, at least one big investment bank was unimpressed with OZ’s proposed merger with Avanco. Credit Suisse stuck with a sell tip on OZ and a price target of $8.55, down 5% on yesterday’s price, and down 10% on the price at the start of the week.

OZ and Avanco was not the only deal to emerge in a week dominated by global political events and ongoing uncertainty flowing from US domestic politics.

In such a climate of uncertainty it was not surprising to see gold retain its position as most-favored commodity, not just by investors in Australian gold stocks but also as a safe haven by big banks, which do not normally favour gold.

Both the Bank of New York Mellon and Goldman Sachs advised clients to beef up their exposure to gold. BNY because it is an inflation hedge and Goldman because history shows that gold continues to move higher even as US interest rates rise – a counter-intuitive observation which has been right in four the past six interest-rate rising cycles.

Other newsworthy events and price moves, up and down, in the mining sector last week included:

  • Ardea Resources being heavily sold off after the release of what management said was an outstanding pre-feasibility study into the Goongarrie nickel and cobalt project in WA. Despite forecasting a cash cost per pound of nickel of just US42 cents after cobalt credits, Ardea’s share price dropped by 30c (18%) over the week to $1.38.
  • Artemis Resources was another stock in the sights of sellers after it was forced to retract and re-word an earlier statement on exploration results at the Carlow Castle gold project. The revision, at the insistence of stock-exchange regulators, saw the share price of Artemis slip 2c lower to 18c, taking the decline to 37c (67%) since Artemis peaked at 55c last November.
  • Hexagon Resources added 4c to 24c after announcing a deal to fully fund its McIntosh graphite project in the Kimberley region of WA. A significant backer of the project is Mineral Resources, a major producer of lithium, and seemingly keen to add graphite to its portfolio.
  • Champion Iron Ore, an Australian listed miner with its primary asset in Canada, lost 5c to $1.19 despite announcing the first shipment of ore from its Bloom Lake mine in Quebec.
  • Fortescue Metals was another iron ore loser over the course of the week, shedding 43c to $4.37 after the company confirmed that a damaging discount on its low-grade ore was getting worse, not better.
  • Talga Resources reclaimed recently lost ground by adding 4c to 82c after announcing participation in a battery research project funded by the British Government.
  • Alt Resources attracted the eye of gold-sector investors after reporting encouraging assays from the Emu deposit at its Bottle Creek project in WA. Best hits included 20 metres at 4.1 grams of gold a tonne, with a 7m core in that section grading 7.8g/t. On the market, Alt added 1c to close yesterday at 5.7c, down on the 12-month high of 8c reached on Tuesday.
  • Gold Road moved 3c higher to 82c thanks to a combination of a stronger gold price and a report that it is now less than a year away from first gold at its Gruyere mine in WA. Macquarie Bank maintained a buy tip on the stock and a 12-month price target of $1.
  • Newcrest Mining said it had resumed mining at its Cadia Hill project in NSW after a recent tailings dam incident. The stock added 5c over the course of the week to $19.65 but continues to underwhelm bank analysts such as those at Credit Suisse who retained a sell tip on the stock and set a price target of $18.50.
  • Breaker Resources added 2c to 55c after reporting new high-grade gold lodes at its Bombora project in WA which support the case for an underground phase of mine development.
  • Heron Resources added 2c to 70c after reporting that its Woodlawn zinc and copper project in NSW was on track to start commissioning by the end of the year, and
  • Salt Lake Potash revealed exploration targets for eight of the nine lakes in the company’s Goldfields Salt Lakes Project, helping to lift the stock by 1c to 58c, and take the gain over the past month to 15c.

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