Gold prices taking a downturn to end a 12-year bull run in 2013 started putting pressure on overextended miners and set the stage for a consolidation in the industry. After $10.5 billion in M&A deals in 2014, nearly $3 billion in deals have already been reported so far in 2015, including the $1.1 billion offer by Tahoe Resources (TSX:THO) to buy Rio Alto Mining Ltd. (TSX:RIO) announced last Monday.
Many analysts expect the trend to continue throughout the year in deals of all sizes. Fidelity’s Joe Wickwire, who manages nearly $2 billion of assets, including the Fidelity Select Gold Portfolio, told Bloomberg in September that it "might not be a bad thing" to see the number of gold producers consolidated by about 33%, essentially to cleanse the industry of weakness.
On Wednesday, the latest agreement to merge miners was disclosed as Gold Royalties Corporation (TSX-Venture:GRO) struck a deal to be acquired by Sandstorm Gold Ltd. (TSX:SSL)(NYSE MKT:SAND) in an all-stock transaction. Per the deal, shareholders of GRO will receive 0.045 of a Sandstorm share for each share of Gold Royalties held. Based upon Sandstorm’s closing price of $4.45 on Tuesday on the TSX, the agreement values a share of Gold Royalties at about 20 cents, which is approximately a 91% premium to shares of GRO closing price of 10.5 cents each on the Venture exchange on Tuesday. Based on Sandstorm's closing share price on February 17, 2015, the total value of the transaction would be approximately C$5.7 million.
In addition to other customary approvals, Gold Royalties shareholders still need to give their thumbs up to the merger, with a special meeting of shareholders anticipated in April for a vote.
Sandstorm is a gold play, but not an operating gold producer. The Vancouver-based company provides cash to miners to become a partner and then acquires a percentage of a mine’s production at a fixed price per ounce of gold. As the mine produces, Sandstorm sells the gold spot prices, creating a revenue stream. The company has a portfolio of 14 cash flowing assets (stream or royalty). To start the year, Sandstorm had about $165 million in capital available for acquisitions.
As the name implies, Gold Royalties operates under a similar business model, with royalty interests centered around net smelter return royalty structures on both operating mines and high-potential exploration projects located across Canada.
Currently, the company has approximately C$2 million in cash and a portfolio of 18 royalties on 13 mining projects located in Canada, including one royalty that is generating cash flow from gold production. Upon the closing of the merger, Sandstorm will have a portfolio of 10 streams and 59 royalties.
Gold Royalties Founder and CEO Ryan Kalt commented in today’s press release, "Not only does the agreement with Sandstorm provide a tremendous premium for our shareholders, but equally important, it is structured such that our shareholders continue to have exposure to not only our existing gold royalty assets but also to the diversified and growing royalty portfolio held by Sandstorm."
Shares of Gold Royalties are trading ahead by 57% at 17 cents and printed as high as 19 cents in Wednesday morning activity.
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