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From IKN437: “Leagold (LMC.to): WWWB? (What Will Woodyer Buy?)”

Here’s a piece that formed part of IKN437, out last Sunday evening, that muses on what targets Neil Woodyer has in mind for his new toy Leagold (LMC.to). Interestingly, since this was published (2.5 trading days ago) Guyana Gold (GUY.to) is up 10.3% and Argonaut Gold (AR.to) is up 8.6%. But that’s probably just coincidence, innit guv? After all, nobody takes IKN seriously.

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Leagold
(LMC.to): WWWB? (What Will Woodyer Buy?)
In the last two weeks, the question
in that title is one that I’ve spent time and conversations on. It’s about
narrowing down the potentials for M&A activity too, because although I’m in
no hurry to buy into Leagold (LMC.to), the company originally formed to buy Los
Filos from Goldcorp (GG) last year, if we can identify the next things on the
shopping list for LMC there’s money to be made.
The background is as follows: Now
that LMC is off and running with Los Filos (e.g. announcing a few days ago the
first part of the underground development program it will need to get the
underground project at the mine working) it’s clearly looking further afield.
In recent days its CEO Neil Woodyer has confirmed to the market that LMC will
adopt a “build and buy” strategy similar to the one he used to great effect at
Endeavour Mining (EDV.to) in West Africa.
Also, a little over two weeks ago at a meet and greet lunch at BMO he was heard
saying that LMC planned to buy “in LatAm” for its next purchase, with
acquisition number three “in Guerrero”, the province where Los Filos itself is
located. That little lot gives us clues, as does the M.O. Woodyer used to build
EDV.
  • Although other metals aren’t out the question, this
    company is obviously a project with gold in mind.
  • LMC is the LatAm version of EDV. The formula works,
    it’s lather/rinse/repeat time.
  • EDV bought late-stage projects, mines working
    sub-optimally, or companies with balance sheet pressure (subsequently
    alleviated by share placements) (also see how Crocodile Gold transformed
    itself and was bought out…same plan).
  • EDV has at least two purchases in mind, even as it
    progresses with Los Filos.
I don’t want to make this a
long-winded piece, so let’s get straight to the point. I’ll be very interested
to hear what other ideas or suggestions you out there might have for potential
targets, but after due consideration and plenty of chinwag with a range of contacts,
here are my three calls as logical contenders. Two are best fits, one is a
possible alternative.
For next
purchase: Best call Argonaut Gold (AR.to).
Argonaut (AR.to) has the right
mix: It’s an operator, it’s in Mexico
(same as Leagold), it’s been woefully run over the years and its assets are in
need of a shot in the arm. After a string of bad purchases which AR refuses to
write down, it currently runs a book value of U$627m, so considering that its
operations turned a minor profit in Q2, just considering its market cap of
approx U$347m (CAD$1 = U$0.80), the price/book of 0.55X points us at one
dysfunctional company that could do with a new broom. Its market cap is roughly
equivalent to LMC’s at the moment too, so it would work on a “merger of equals”
marketing frame.
For next
purchase: Possible call Guyana
Goldfields (GUY.to):
If it weren’t for the fact that GUY is 1.5X the market cap
of LMC at the moment, this would be my prime choice. As things are, it might be
too much of a reach at the moment. GUY operates the Aurora
mine in Guyana
and had a problematic Q2, which along with a piece of minor bad news about Q3
recently has seen its share price drop quite sharply. Again a producer, again a
great fit, GUY also has some financial debt on board which weighs on its bottom
line results and that’s a fit for the Woodyer model, too. However, in order for
this one to be a live possibility we’d need to see its PPS climbing first
because no board in its right mind sells out at lows unless under serious strain.
For
subsequent purchase: Alio Gold (ALO) (ALO.to):
After hearing recently that LMC
planned to buy its next thing outside of Guerrero before buying again inside, I
put a potential spec on hold. But it’s only on hold, because if the
circumstances pan out it’s my most likely buy of the three. Alio Gold (ALO),
previously known as Timmins Gold and owner of the Ana Paula project in Guerrero
as well as the San Francisco operating mine in the North, is the only one that
truly fits (Torex is way too big, nothing else there has the advanced project
status Woodyer would require). At a market cap of C$190m approx, it’s the right
size too. Another potential synergy is that if (repeat IF) LMC does a deal with
Argonaut, the San Francisco operation would fit right in with the AR assets,
geographically close and with obvious cost benefits for the larger corporation.
Bottom line: We know LMC plans to
repeat the EDV model, be aggressive and build something with specific gravity
in LatAm in the same style as EDV has in Africa.
It’s always tough to second-guess M&A targets, but on consideration I think
there’s a chance that the first target will be Argonaut. I don’t plan to trade
that myself, it’s a little too much like trying to convince myself I’m right.
However, once LMC jumps and makes its purchase, it would then make all the
sense in the world to take a long position in Alio Gold, first because LMC’s
plans were then off and running, second because LMC wants something else in
Guerrero as purchase number three and ALO is the only thing that truly fits the
bill. If the second purchase (i.e. Los Filos is number one) turns out to be
Argonaut that would just add more conviction to my ALO thesis, as San Francisco would fit
into the plans more closely.
But one thing is sure: It’s not
guesswork or conjecture as to whether LMC will go the M&A route, it’s a
case of when. CEO Woodyer has not hidden the corporate strategy and the roadmap
looks very similar to the previous EDV success. The only issue is the timing.

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