M&A Action Picks Up In Gold And Silver Miners Which Is Strong Bullish Signal For The Gold And Silver Stocks
Mergers and acquisitions are increasing and arrived with one of our top picks SilverCrest Metals. On October 4, 2024, SilverCrest announced that Couer Mining made an all-stock offer valuing SilverCrest at $1.7 billion.
After the merger, Couer Mining shareholders will own 63% of the company and SilverCrest Metals shareholders will own 37%. One of the highlighted benefits for Silvercrest shareholders is that they will get a 22% increase from the previous day’s closing price.
That is not an overly compelling argument as they already had a stock that went from the lower left of the chart to the upper right and was up approximately 100% from its yearly low prior to the offer.
Silver is just starting to enter a bull market so on its own SilverCrest would be entering into an even better market for gold and silver miners that is likely to draw in generalist investors. There are very few high-quality stories like SilverCrest for them to choose from.
One of the knocks against SilverCrest is that it was a single asset miner which never bothered me because Las Chispas is such an impressive mine.
Another knock against them was that the mine life was not overly long. I never agreed with that because I understand epithermal vein exploration fairly well. In SilverCrest’s case, they have a cluster of epithermal veins that they focused on only a few of them for initial mining.
Plenty of the veins in the cluster remain to be explored with drilling and won’t be burdened by the economics of needing to cover the costs of building a plant. As it is already built and paid for, it can be a hub and spoke opportunity.
Their business model was to prove up a relatively short mine life on the lowest hanging fruit and then continue expanding on the mine life with additional drilling. This made a ton of sense because with what they drilled off, they knew that it had exceptional economics with a high IRR that could quickly pay back the costs of bringing Las Chispas into full commercial production.
Since paying back the capex, their model was proved in spades as they have been able to build reserves of cash, gold and silver of $122 million.
Now that a takeover is on the table, the future of the Las Chispas mine will be in the hands of Couer Mining if it goes through. It has been a long time since there has been a bidding war for a precious metals miner. I don’t think it can be ruled out that a competitor could arrive, the Las Chispas mine and the cash and bullion reserves held by SilverCrest would be attractive to other mining companies.
As the takeover is currently proposed the new Couer Mining would be a 63-37% deal for the Couer Mining and SilverCrest Metals shareholders. Technically, that doesn’t really make it a merger of equals.
We will never know if SilverCrest Mining on their own would have resulted in them rewarding the shareholders more than teaming up with Couer Mining. If Couer Mining is successful at taking over SilverCrest, we will find out if it helps Couer Mining grow into a much larger company.
Initially, when reviewing the takeover proposal, I see it will help Couer Mining reduce their debt and operating costs. Las Chispas will also help them increase their production, as noted in the news about the takeover offer, the new Couer Mining would produce 21 million ounces of silver and 463,000 ounces of gold in 2025.
Based on estimates of free cash flow using lower prices of gold and silver than the current spot prices for those metals, they mentioned an estimate of $350 million of free cash flow in 2025.
There are plenty of details in the news release about the takeover that rationalize the reasons both companies feel this is a win-win situation. Please read the news release for more details about the proposed transaction.
In Closing
The increase in mergers and acquisitions in the precious metals sector is a clear sign that bigger miners see opportunities to take over smaller miners.
Until around the middle of February of this year, the gold miners were reluctant to join the gold bull market. Since then, prices have increased in a significant way for the gold miners. But are still relatively cheap based on key metrics of historical prices of assets for gold miners, gold mine developers and gold explorers with important discoveries.
Consolidation is the outcome that will happen early in a transition to a better market for gold stocks, which we are seeing now.
Silver has improved of late, but still remains well below its record high while gold is trading at its record high. What is happening in the silver price is an indicator of where we are in the gold bull market.
The most compelling bullish argument for silver is that gold is in a powerful bull market. Additionally, the physical supply of silver is being overwhelmed by physical demand from silver as a monetary metal and for solar panels. Silver is currently in a deficit that looks to grow in the short-term and long-term.
Yet, silver hasn’t yet entered into a powerful bull market like gold. Which leads to my conclusion that we are still in the earliest days of a gold bull market and that silver is primed to go much higher.
Another indicator that I follow closely to determine where we are in a gold bull market is the performance of the gold stocks. So far, only the gold miners have come off the canvas from the prolonged bear market which turned the corner in February of this year.
The gold mine developers have yet to really join the gold bull market. They are crucial players in the industry as they have the projects that can help gold miners replace their old mines with new mines. They are another sign that we are still in the earliest days of a gold bull market.
Gold explorers with important discoveries are the ones that provide the projects that advance into the development stages. With so few projects in the development stages, it shows that the supply chain is weak and will stay that way for a decade or two. So far, the gold explorers with important discoveries are still dramatically under-appreciated which is another confirmation that we are still in the earliest days of a gold bull market.
The gold miners are generating remarkable free cash flow growth because the price of gold is well over $1000 above the average cost of producing gold amongst the gold miners. The second quarter of 2024 was the best ever for the average price of gold for a quarter and the third quarter beat the second quarter by a healthy margin.
The stock performance of the top gold miners suggests that generalist investors are starting to pay attention to the free cash flow growth in the gold miners. This trend is primed to continue as gold is in a powerful bull market that will keep the free cash flow growth exemplary compared to many industries that generalist investors put their investment money in.
It is a great time to be a gold miner. Silver miners look to be heading into a much stronger market for silver as well.
I’m absolutely convinced that generalist investors will continue to take a shine to gold and the gold miners. In the near-term, I also expect them to get more bullish on silver miners, and then the gold and silver mine developers and explorers with important discoveries.
One of the most exciting aspects of where I see the trends going is that when generalist investors get more bullish on precious metals stocks, they will have a tiny menu of top mine developers and explorers with important discoveries to choose from.
All key indicators that I follow suggest to me that gold is still only in its earliest days of a powerful gold bull market. If I use the calendar to describe where we are in the gold bull market, I would say we are still in the first week of January.
To move into February, silver would need to be at or close to its record high, and we would have to see a much better market for the gold and silver developers and explorers with important discoveries.
The gold bull market Valentine’s day is still off in the future. But, it is much closer than many gold bulls believe as can be witnessed in the valuations of gold stocks down the food chain and for sure few generalist investors believe is coming.
It’s a good time to go shopping for gold and silver presents for your significant other to beat the rush.
All the best,
Allan Barry Laboucan
Disclosure
Rocks And Stocks News does not make buying or selling recommendations. The reports are for information purposes only. Sponsors pay a fee to Rocks And Stocks News for content creation. The business model of Rocks And Stocks News is to fund research and reporting on the sector, picks and sponsors through corporate sponsorship. We are thankful to sponsors for enabling commentary free of charge to readers and viewers of the reports. When reporting on sponsors it is on behalf of the sponsors discussed in the portion of the report mentioning the sponsor. Before making any investment decision it is important for you to speak with your financial advisors to consider your risk profile. It is also important to do your homework. To help in that process, Rocks And Stocks News means to be a gateway by doing reports and interviews of management of sponsors and picks. The reports and interviews should not be considered investment advice. Allan Barry Laboucan is the founder and owner of Rocks And Stocks News, he has worked in the mining sector since 1993 and has been reporting on the sector since 2005. He has worked with and been mentored by very talented geoscientists in geology, geochemistry and geophysics. He uses the skills he has picked up during his career to assess sponsors and picks in the reports. Whether a company is a pick or a sponsor they go through the same filter and are reported on when important news is made that Allan Barry Laboucan wants to discuss on the Rocks And Stocks News platform. He may own shares in sponsors and picks for investment purposes which he discloses when discussing them in the reports.
