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Newmont (NEM) and Continental Gold (CNL.to): Intel (from IKN499)

This was read by subscribers to The IKN Weekly on Sunday. Now it’s your turn.



Newmont (NEM) and Continental Gold
(CNL.to): Intel
I semi-promised
I wouldn’t come back to this whole CNL Buriticá thing for a while just a couple
of editions ago, but I’m going to have to break that semi-promise. This
weekend, a reputable source passed on intel that by its nature must remain
unconfirmed (so please keep that in mind, I have no second lead on this) but
due to the respect I have for the seriousness of my source it’s going to get an
airing.
This: According to my source, the board of Newmont (NEM) is meeting this week
coming to decide, in an up/down yes/no manner, whether to buy out the remaining
80% of Continental Gold (CNL.to) that they do not already own. Also, my source
stated that NEM is not at all happy with the current situation there and says that
if NEM stays, they want full control and ownership of the project. End.
Okay, the beans spilled let me
first reiterate that though my source is a good one, a serious mining
professional and has proven to me over the years to be a trustworthy individual,
the rumour is unconfirmed and I have no second line on the information. With
that said and after consideration, as long as we assume the intel is solid
here’s a thought or two (after conferring with a few trusted peers, who helped
crystallize ideas and added a couple of angles), done in bullet point form.
  • Critically, NEM is in a standstill agreement with CNL.
    Therefore there can only be a friendly takeover. This means NEM would have
    to table enough money to interest CNL, its board and its shareholders.
  • Considering the current price range (let’s say
    “between $2.00 and $2.30” for argument’s sake) and from where CNL has
    dropped recently (I’m going to rough-say $4.00, before its recent security
    issues came up, feel free to argue that number), it would need a very big
    premium to current market to interest CNL.
  • The NEM board will know this as they make their
    decision. And in the event they decide to make an offer, it would almost
    certainly be of the one-time, “take it or leave it” type.
  • This would mean that, in effect, NEM would have to
    ignore the current market price for CNL and make an offer that’s more akin
    to what CNL think their company is worth. However and also critically, the
    current stock price isn’t just a number picked out the air or floating in
    its own dimension, this current range is a reflection of CNL’s
    well-documented troubles and issues. NEM is fully aware of all of them and
    there are a whole list that start with the deaths of its two employees at
    Buriticá town and then the three geologists at its Berlín project. Other
    matters are certainly of concern to them as well, such as exposing more of
    its own company employees more directly (instead of being there on an
    occasional and consulting/advisory role), the judicial uncertainty in the
    country (see Regional Politics today for the latest example), the
    continued presence of illegal/informal miners and far-right wing
    paramilitary groups. Also, I am quite sure NEM is considering the
    potential liability of legal actions brought against the company by the
    families of the dead employees, especially the geologists. The recent
    resignation of CNL country president Restrepo was a necessary move, but
    it’s also a recognition of responsibility for the internal mistakes that
    led to the fatal incident.
  • At this point, we should also note that NEM has not
    ignored the current situation, to the point where the NEM CEO made
    prepared comments on the problems during the company’s 3q18 Conference
    Call.
  • Another subject is the NEM corporate culture, which
    has always been notably (even notoriously) conservative. This is not a
    company of risk-takers and that’s particularly true on the issue of
    political risk and social security. It’s worth recalling the way NEM
    entered into Buriticá, via a minority purchase which brought them de facto
    control of the project. For around U$105m they got 19.9% of the company,
    but they also got directors on the board and their technical team leading
    the build-out. It was in effect a call option on 10m oz of high grade gold
    and for the price, it was a smart bet on a potential risk/reward basis,
    they would be inside the company and the project and would know whether to
    pull the trigger. I know that U$105m is real money, but it’s the type of
    sum NEM can risk without it affecting the company (too much). Also, we
    should note that if NEM decides to exit, they’re going to get a decent
    wedge of that outlay back.
Therefore, the application Occam’s
Razor gets me to the call that NEM will likely bail. I have no idea how they’d
do that and there are a whole range of options, from keeping the current share
position for a while, not taking up their pro-rata rights on any new financing,
selling in a block or piecemeal way, entertaining offers for their minority
share position etc. Also, it may not effect the project in the longer-term
because I’ve also picked up talk that streaming companies are interested in
financing the missing capex. If true, CNL may end up getting there on its own
and becoming a success, but if NEM does back out CNL is going to take a near-term
share price hit, that’s a certainty.
The bottom line is this:
1)    
I have unconfirmed intel from a reliable source. The rest
of today’s piece is built on the assumption that the intel is correct.
2)    
I think the most likely NEM decision at this point will be
to back out of CNL and Buriticá. They may do this by tabling a “take or leave
it” offer to CNL that is too low. They may simply decide not to go any further.
If NEM leaves then the CNL share price will take a hit, at least in the
near-term and perhaps for the longer-term as well.
3)    
However, be clear that I may be wrong. NEM and CNL could
reach an agreement, NEM buys CNL at a very high premium to this weekend’s share
price, those betting on the junior today would make a handsome return in a
short period of time. There’s a binary trade on offer here.
And finally, for what it’s worth I
will not be trading this development personally and will remain neutral CNL. I
could make up a rationale for this decision that would sound perfectly
reasonable, but the real reason is that I have a moral repugnance to the way
CNL goes about its business and even shorting it to make money would be too
vindictive on my part to be healthy. I pass this intel and analysis on an as-is
basis, do with it what you will.
UPDATE: Rather than re-edit I’m
going to add this new information on here, as the above shows the thought
process and now this helps solidify things a little more. After casting the net
in a couple of specific places and reaching out to people that may know, I
received a reply from a 100% solid, zero BS, ultra reliable source. This person
told me that they’d been asked by a powerful private equity group in the mining
sector about Buriticá this week. The PE group wanted to know their thoughts on
the project and asset, their thoughts on the management (specifically CEO
Sussman) and said there was an opportunity for them to get control. This goes
some way to corroborating my original intel (it’s not an exact match, but if
you believe this to be a coincidence then I have a bridge to sell you). It also
suggests that Newmont is already shopping its 19.9% portion around.


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