Another Miner Merger and More Gold Sector Consolidation
On September30th, we had an announcement of a second miner merger proposal after therecently concluded Denver Gold Forum. North and Central American focused silverminer/developer Americas Silver (USAS) announcedthat it has agreed to acquire Nevada-focused gold developerPershing Gold (PGLC) at an implied value of $56.7 million. Under the terms ofthe deal, Pershing shareholders will receive 0.715 Americas Silver shares foreach common share held, which implies a value of $1.69 per Pershing commonshare and reflects a 39% premium to Pershing's closing price last Friday on theNASDAQ.
ReliefCanyon, Pershing’s flagship project, is very high-margin with a pre-tax netpresent value at a 5% discount rate of $118 million and a pre-tax internal rateof return of 71% at spot gold prices. The district scale sized property is only20% explored with plenty of blue-sky potential. Pershing has also raised over$90 million over the past several years in developing Relief Canyon, so I feel AmericasSilver is getting a very good deal during a depressed market.
Accordingto AmericasSilver CEO Darren Blasutti; “Simply put, this is a great project from ourperspective. There are very few oxide heap-leach, open-pit mines with lowcapital intensity available today. Whether the gold price is good or bad, therationale to own this mine is there.”
Theannouncement came on the heels of last week’s blockbuster deal of Global minersBarrick Gold (ABX) and Randgold Resources (GOLD) announcingthey have agreed to merge in an all share, no premiumtransaction which will solidify Barrick as the world’s largest gold company byproduction. A few days after the merger was announced, Barrick executivechairman, John L. Thornton, bought$25.2 million worth of shares in the company. The increase inM&A activity has historically taken place near major bottoms as itincreases generalist attention to the sector.
Meanwhile,the gold price has seen some safe-haven buying this week on the back of astronger U.S. dollar. On Tuesday, gold reversed course and ran up over $15towards resistance at $1220 in December Gold along with a rising greenback. Therise was mostlyattributed to an Italian government official stating the countrywould be better off with its own currency. However, December Gold sold off intothe close on Tuesday and continues to trade just below its 50-day movingaverage. This moving average has been a strong technical resistance level goldhas been unable to close above since it broke harshly below it in late April.
The GDX hada gap up move on the news this week, but the rise was also halted at its 50-daymoving average. The major miner ETF is attempting to put in a bullish inversehead & shoulders bottom, which may be confirmed, or denied, onthe back of this mornings highly anticipated U.S. Non-Farms Payroll (NFP) report.
A few moresigns of a possible bottom being created in gold stocks is the inverse head& shoulders pattern also forming in the GDX/GLDratio, along with the breakdown in the gold/silverratio. Gold stocks, along with silver, tend to lead the metalshigher once a major bottom has been put in place.
Gold hasbeen down sixconsecutive months, which is the longest monthly losing streak sincethe secular bull in bullion began at the turn of the century. Moreover, theCommitment of Traders report (CoT) is more bullish than the December 2015bottom, as Commercials have been net-long for four consecutive weeks. Commercialtraders, who are considered the smart money, have not been net long since 2001as well.
Thetechnical levels to watch on a weekly closing basis in December Gold are $1211on the upside and $1194 on the downside. The first to be taken out on a weeklybasis close should tell us which way this two- month consolidation in thesector will break as we head into the next FOMC meeting on November 7-8th.
Caution isstill advised and a large cash position in your junior resource stock portfoliois recommended. Stop by my website at www.juniorminerjunky.com and sign up to be on the free email list. You will receive this column in yourinbox each week, along with interviews and updates on my subscription serviceavailability.
Fulldisclosure: I havebegun to accumulate shares of USAS this week and have recommended this companyto my subscribers. I purchased the shares in the open market and do not receiveany monetary compensation, or stock options from any of the companies I investin, or discuss in my Kitco weekly articles. Please do your own due diligencebefore purchasing shares in any of the companies mentioned in this article.
By David ErfleContributing tokitco.com
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newsfeedback@kitco.comwww.juniorminerjunky.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.