Today I announced a likely takeover of one of the companies in my Golden Portfolio 10X (GP10X) portfolio. It’s the 4th or 5th company in as many months from the portfolio to get acquired…
This kind of takeover activity is not surprising, especially in this stage of the bull market.
That’s because the easiest (but not always the cheapest) way for gold miners to replenish their resource is to acquire smaller companies.
Remember: every gold mine loses value for each ounce of gold that comes out of it. And for a gold miner to continue to stay in business, they need to continually replenish their gold resource, or they run the risk of mining themselves out of business.
That’s true for large cap firms like Newmont (which bought Goldcorp for $10 billion in 2019) and Barrick (which merged with RandGold in the same year.)
It’s also true for smaller/mid-cap firms that are running out of resource and exploration/development opportunities in their existing pipeline.
We’ve seen an uptick in this kind of takeover activity because following the 2012 peak in gold prices, the cupboard was bare for even some of the larger and better run gold firms.
Lower gold prices force everyone to tighten their belts, even if the majors would have preferred to go on a buying spree of undervalued projects.
Instead, we’re now seeing some of these companies play catch-up.
Typically, a takeover comes at a premium to the prevailing stock price – which is always nice, but gold investors are always yearning for that 10-bagger that comes out of nowhere and rises quickly before a major or even a mid-cap can scoop it up.
That’s kind of where I’m trying to position my GP10X portfolio.
The sweet spot is to find pre-production junior developers/explorers that have excellent gold projects. If I could describe my ideal junior gold stock, it would be a very small firm selling for a substantial discount to its net asset value (the total likely value of its gold assets minus its liabilities) that’s just not quite large enough to move the needle for a large cap miner.
You see, the biggest gold companies don’t get out of bed for anything smaller than what are known as “Tier 1 projects,” which generally means projects that are likely to produce more than ~500,000 ounces a year.
For instance, one of Newmont’s smallest active projects is the Yanacocha project in Peru. By any account it’s a giant mine and it’s already produced for decades. But it peaks out at about 270k ounces per year.
Last year, Newmont produced over 5 million ounces of gold. Add in gold equivalent ounces, and the number jumps to over 6 million ounces.
That kind of production treadmill means the company can not spend a lot of time, money or attention on projects that are likely to be significantly under 500k ounces/year – or on projects that are likely to have a relatively short lifespan.
That means they can’t go out and buy every potential 100k ounce project. It wouldn’t be worth their time even if they could manage to develop them all. Large companies can’t even look very hard at sub 500k ounce projects.
They really need to find slam dunk, Tier 1, 500k ounce projects. Everything else is too risky for not enough reward. It’s the same kind of problem that large holding companies like Berkshire Hathaway face. They can’t buy every value stock. They have to focus on companies large enough to have an impact on their bottom line. This “too small to invest in” problem is an opportunity for individual investors like us.
We can move the needle in our portfolios very easily compared to large investors.
That’s part of the reason why I focus my efforts on this narrow sliver of the gold market that’s in this sweet spot. I’m taking advantage of the fact that most of the time, most of the companies I cover are simply too small for giant investors to pay any attention to.
And even then: we still get acquired by mid-caps from time to time.
That’s the bad news – and it’s not that bad considering we’ve been taken over at a premium to the prevailing stock price. My GP10X portfolio is up an average of 73% this year.
I also typically recommend that my readers opt to claim shares in the event of a takeover, so they can still get the upside from the original project – albeit diluted by the ownership of the rest of the projects owned by the new company.
Right now, I fully expect we’ll continue to see some of our GP10X holdings acquired by larger companies. Ideally, we’d ride every project to a 10 bagger – but that’s not going to happen every time. That’s why I cover a couple dozen companies at any given time: to give my readers a bunch of bites of the apple.
I think we’re going to have plenty more, and I’ve just added three more juniors to my portfolio in the past week.
Acquisitions are a bullish indicator, and while I’m a little bummed to see some of my favorite companies get taken over, I know it’s a good sign of what’s to come.
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio
P.S. Right now, I’m running a special promotion: you can access five of GP10X’s top recommendations inside my introductory service, Golden Portfolio IV (GPIV). It’s the perfect way to get exposure to pre-production junior developers and explorers—without committing to the full GP10X portfolio just yet.