04/28/2013

Takeover Trend of Near Term Producers

I analyzed two stocks today - Oroco Resources and Cerro Resources - that continued a trend.
Both of these companies had very similar stories. They were both near term producers with very advanced projects. Once the projects were de-risked, larger companies came in and made offers.

Goldgroup mining bought the Oroco Resources project for $18 million in cash ($38 per oz M&I). But it has exploration potential, so they are paying much less. Shareholders had an easy 5 bagger if it went into production. Instead the stock didn't move. Most of their shareholders will end up losing money on this stock. It is supposed to finalize in June.

Primero Mining bought Cerro Resources for a 77% premium ($40 per M&I oz). But like other stocks, that 77% premium does not get all shareholders back to even. And for most shareholders it barely gives them a profit. If Cerro would have built the mine (production was scheduled for 2014), it would have been at least a 5 bagger.

This trend is unsettling and has been occurring since 2009. Companies continue to give away their resources in takeovers and shareholders do not rewarded. I think this trend will continue until gold prices take off and cash flows increase. Until there is a recognition that gold in the ground is valuable, this will continue. The only way to hedge against this trend is to overweight your portfolio in producers.