Update on Speculation in Gold and Purchase of Abitibi Royalties Inc.

In the October 2015 edition of The Financial Passage Maker, I wrote about speculation in gold.  I mentioned a few of the companies on my list of speculative buys.

I got lucky with St Andrew Goldfields.  Purchased on 2015/10/06 and sold 2015/11/20.

Nov 16, 2015
Kirkland Lake Gold Creates An Ontario-Focused Intermediate Gold Producer With The Acquisition Of St Andrew Goldfields

Toronto, Ontario (November 16, 2015) - Kirkland Lake Gold Inc. ("Kirkland Lake" ) (TSX:KGI) and St Andrew Goldfields Ltd. ("St Andrew") (TSX:SAS)(OTCQX:STADF) are pleased to announce that they have entered into a binding definitive agreement (the "Agreement") whereby Kirkland Lake will acquire all of the outstanding common shares of St Andrew pursuant to a plan of arrangement (the "Transaction") to create a multi-asset, Ontario-focused, intermediate gold producer.

Under the terms of the Agreement, common shareholders of St Andrew will receive 0.0906 of one common share of Kirkland Lake (the "Exchange Ratio") for each St Andrew common share held. The Exchange Ratio represents the equivalent of C$0.47 per St Andrew common share, based on the closing price of Kirkland Lake on November 16, 2015. The Exchange Ratio implies a 46% premium based on both companies' 20-day volume-weighted average prices and a 25% premium to St Andrew's closing price, both as at November 16, 2015 on the Toronto Stock Exchange. The Exchange Ratio implies a total equity value of approximately C$178 million on a fully diluted in-the-money basis.
http://www.sasgoldmines.com/s/NewsReleases.asp?ReportID=730487&_Type=News-Releases&_Title=Kirkland-Lake-Gold-Creates-An-Ontario-Focused-Intermediate-Gold-Producer-Wi...

I took my profits (27 percent).  There is always the temptation to hold on for greater gains, but I've learned to temper my greed and rein in the inevitable increase in self confidence which is generated by profitable ideas. Further, I don't foresee any catalyst that would lead to a significant increase in the price of this stock in the near term.

At this stage in the mining cycle, most of my bets have centred around picking companies with operations in established mining camps in the hope that they will be taken over by neighbouring mining enterprises looking to expand their reserves.

My rationale:

• the belief that it is generally cheaper for nearby mines to absorb neighbouring mines/prospects into their operations than to develop "greenfield" prospects because of an already-established infrastructure
• the attraction of "de-risked investment" in the sense that purchaser has a fairly reliable estimate of proven and potential reserves in potential acquisition targets and can "kick the tires" through site visits and reviews of the financial condition of the targets

I am not a mining geologist, nor do I have the time and resources to survey the many potential investments in properties which may be taken over by larger enterprises.

In my reading, I came across an interesting company which does this - Abitibi Royalties Inc (RZZ) http://www.abitibiroyalties.com/

In a nutshell, here is Abitibi's mission:

Abitibi Royalties' objective is to capture the upside potential inherent to the various stages of the mining sector, while limiting the risks related to the difficulties in assessing the rate of success and accurately predicting the costs for exploration, development, and mine operation.

It is well worth listening to Ian Ball's presentation on YouTube (see link below). The President of Abitibi is all of 32 years of age. Some people may hold this against him.  Not me ... youth is no metric of business acumen ... one need only look at the mental deadwood which populates (or once populated) the higher echelons of many mining companies ... testosterone-charged middle-aged and older "good guys" who trashed the values of some former world class enterprises by following the easy path of the herd. These guys failed to recognize that the party does not go on forever, especially in a cyclical industry like mining.  A "non-bonehead" would depart from the herd and conserve resources during the good times in order to acquire fallen angels at bargain prices during hard times - a great way to build share owner value. The only problem with this model is that few investors have the capacity for "delayed gratification".

I am impressed by Ball's approach.  Don't be distracted by the click of coffee cups hitting plates during his presentation as people seek to consume their drinks before they get cold.  (The coffee at these events is usually abysmal and is inhaled only as part of the "ritual of the table" - not for its intrinsic gastronomic qualities.)

Note the frequent use of "we" in his dialogue.

Ian Ball's Presentation

His letter to shareholders is clear.  It does a very nice job of summarizing Abitibi's approach.

President's Letter to Shareholders

Some observations:

• Abitibi is a tiny enterprise.  I have the sense that it has the agility to move more quickly than its larger competitors, and possibly, to be more innovative.
• It is a high risk enterprise.  Most of its deals will never be profitable.  However, the company has structured its bets such that a loss in any one property will not compromise the company unduly.
• In my view, the company is exploiting a interesting "niche" at this stage of the mining cycle where junior miners and prospectors are finding it very difficult to obtain financing at reasonable terms. http://www.abitibiroyalties.com/theroyaltysearch/
• I looked at the company's mining interests and found that they generally are located in proximity to established mining camps. 
• It is possible that Abitibi may inspire/encourage its partners to use innovative approaches to develop their mining interests.
• One of Abitibi's major shareholders is Rob McEwen, one of Mr. Ball's former bosses.  McEwen is one of Canada's most successful mining entrepreneurs and doubtless, will provide advice to the mutual benefit of him and Abitibi.  The value of good connections cannot be over-estimated. 

I have added this company to my holdings of speculative gold mining companies.  However, my time horizon is different: I am prepared to wait several years with the hope that Mr. Ball will strike it rich on one or two or his bets.  It's great to see young talent in this business - also  to see an innovative approach to mine development which is tailored expressly to the needs of the day.

Postscript

I am always impressed by timely responses from companies - in this case an e-mail from Ian Ball on November 23rd responding to my e-mail a few days earlier:

Hi Mark,

Thank you for the email and directing me towards your blog. I appreciate your confidence in Abitibi Royalties and the writeup. 

You maybe interested in our new investor presentation that was posted on our website last week:  http://www.abitibiroyalties.com/investors/presentations/

The only thing that struck me on your blog was the "Royalty Search". Although this could be an important part of our business in the future, the main value in the near term will come from our 3% NSR on the Odyssey North discovery at the Canadian Malartic mine. Agnico Eagle and Yamana have been drilling here for 8 months with 3 drills. No new results have been issued beyond the initial 10 holes, but both Agnico Eagle and Yamana have indicated they are having success at the property. 

All the best,

Ian 

A Cautionary Tale

Investing in new mining developments is risky.  The recent meltdown in the share price of Rubicon Minerals Corp as a result of unanticipated expenditures is a case in point.  

“People overlooked the fundamentals,” said Steve Parsons, an analyst at National Bank. “There are lessons learned here.”

This article is well worth reading.  Critical thinking sometimes fall by the wayside during high points in the gold cycle.  Note also, the understandable reluctance of the company to be more forward in reporting adverse results. 
http://business.financialpost.com/news/mining/lessons-from-the-meltdown-of-rubicon-minerals-corp