Over the past year, I’ve had 9 companies that I cover in my paid portfolios get bought out by a larger gold firm. The last buyout happened on Halloween.
A buyout or acquisition is always bittersweet. On one hand, ideally I like to see my favorite companies mature and blossom on their own – so that if you own them, you get a pure play benefit on the underlying company’s success. On the other hand, buyouts typically come at a premium to the prevailing stock price.
When they get acquired, existing shareholders typically get a pro-rated share of the new parent company based on the takeover valuation and how many shares they owned of the acquired company. That can be okay, but that means your upside is lumped in with the other projects at the new company, which might not be as profitable or successful.
It’s almost inevitable that the value I see in a company will sooner or later become obvious to a gold major looking to fill its pipeline – especially if it’s an incredible value with massive upside, which tend to be the only companies I’m looking for in the first place. And I’m not alone, of course.
Remember: every gold major is in the unenviable position of having to continue to replace its resource base – or it risks mining itself out of business.
One of my favorite companies ever got acquired early this year and it’s kind of a perfect storm of what a small royalty firm can achieve if the management is both competent and a little bit lucky.
I’m talking about Orogen, a small royalty company that managed to buy a royalty that ended up giving them a gold property with over 100,000 ounces of gold, worth $361 million at $3,000/oz gold… when it only cost them $100,000 to buy it…
That’s like buying gold for $1/oz. The story sounds absurd – but I was really hoping to ride out Orogen for what would have been an easy 10X with potential 100X upside… but it was not meant to be.
Orogen got acquired this past July and we “only” saw a 276% portfolio gain in the ~18 months we held it. I was in the process of working on a marketing campaign for this stock – and part of the struggle was coming up with a way to talk about this company that didn’t make it sound too good to be true.
$1/oz gold sounds fake! It was true but no one would have believed it. I can’t blame anyone for balking at this kind of claim. But it’s part of the allure of gold royalty businesses: they’re able to secure incredible deals. Sometimes they’re so lopsided and absurd that it’s only a matter of time before they get bought out…
Royalties are some of the best companies not just in the gold business, but in any business. They get long-term royalties and streams in exchange for up front cash. Warren Buffett always talks about a toll bridge being the best business in the world, and that might be true, but you can’t exactly go buy a toll bridge.
I’ve looked. There aren’t any toll bridge stocks. If you find any, please let me know!
But these royalty businesses are a close second… and they have the benefit of actually existing as stocks you can buy with any brokerage account.
Right now, I have two royalty firms in my GPIV service. It’s my lowest cost service and I try to keep at least 4 companies in it at any given time. It’s tough because even in that smaller sized portfolio, an acquisition is always a possibility.
I’d be lying if I said we won’t see more acquisitions in my paid portfolios. We're in the middle of a massive boom. Gold majors are going to open their checkbooks. They have to.
We still benefit from these acquisitions – just maybe not quite as much as if these companies were left alone to hit their full stride. The question is: will these majors buy them sooner for less, or later for more?
Best,
Garrett Goggin, CFA, CMT
Lead Analyst and Founder, Golden Portfolio