A Snippet from tonite's Midas On the macro scale the metals trade remains as rigged as ever and no doubt this is very discouraging for the investors that have chosen to stay on board through the last 2 years. However today a very important news item crossed the screen that has me feeling much more bullish overall. First Majestic is one of the premier silver producers and I have owned this stock for about 10 years to watch it grow from an emerging junior with a few hundred thousand ounces of silver production a year to where the company now has issued guidance for more than 10 million ounces of silver output for 2013. They have done a lot of things right through this silver bull market and the share price has performed as one of the sector leaders during that time. First Majestic has used a strategy of acquisitions to achieve some of its rapid growth, and last year the company announced a friendly takeover offer for Orko Silver, to gain control of a large undeveloped silver deposit in Mexico.
Today Coeur D'Elene announced it was launching a hostile competing bid for Orko. Now this is a very big deal in my opinion. First off, I cannot recall a single major contested takeover deal in the entire sector since this bull market kicked off, prior to today. When I think of how promising juniors like Wheaton River Minerals and Glamis Gold were acquired earlier in this cycle, there was never a competing bid offered. Through the last 10 years as gold and silver have been rising to historic levels, it seems no other companies were ever interested to engage in a bidding war for undervalued assets and shareholders were basically forced to just take it or leave it on the terms offered in these deals. This contrasts sharply with previous bull market cycles in the mining sector that were characterized by bidding wars and hostile deals that grabbed the attention of the entire market.
The bear market low trading regime for so many juniors at this time is directly related to the fact that excitement has not been a part of this market for a long time. The kind of aquisition deals that have been closing in recent years can be better described as take-under offers. Why should speculators buy up quality candidates in anticipation of a potential takeover deal when the price that is paid after a long wait amounts to a valuation well below the highs for these stocks? And in the absence of competing bids, there is no hope for a better deal to emerge, no reason for a speculative upside for the other players in the sector.
Contrast that behaviour with the mania that developed in the tech sector during the late 90s. Even the rumor of a potential takeover deal was enough to send stocks prices surging across the board. Tiny start up companies instantly commanded market valuations in the hundreds of millions of dollars and dot.com traders were getting rich quick playing these stories.
To see the mainstream market analysis of the precious metals sector even using the word mania during the current market environment is a joke. Things could not be further from a mania in either the metals or the mining stocks. Chart the action in the HUI or GDXJ and try to find even a hint of bullish excess. This is a sector that is bouncing along extremes of bearish exhaustion. Which is why the Coeur D'Elene news is so important. Coeur has already established itself as an aggressive consolidator when the company agreed to buy Palmarejo for more than $1 billion in 2007, for a large undeveloped silver-gold project. Silver was trading in the low teens at that time. Now they have significantly increased the price offered for Orko and put the ball back in First Majestic's court to see if an even higher bid will materialize.
I note that other potential takeover candidates are catching a bid in this market today, no doubt encouraged by the Orko deal. This on a day when the metals are trending lower. And that is exactly how a healthy speculative cycle builds momentum. It allows specs an opportunity to focus on something else than the steady manipulative grind of the metals trading or the usual capping routine imposed on the larger mining stocks.
Looking ahead this could be the start of a trend change. Having companies fighting over undeveloped deposits sends the message that these stocks are indeed undervalued in the current market environment. Secondly, it may be a warning shot that starts off other acquisition deals as there are many other senior miners that can begin to take runs at the late stage mineral deposits which have been largely ignored for a couple of years. I would not rule out asset grabs from state owned Chinese companies either for that matter. This could finally begin to draw specs to buy up junior mining companies again, forcing shorts to begin covering positions, and allowing a rebound to commence for the sector that has been so trapped in a severe bear phase.
I am not a big fan of Orko Silver and have never had much nice to say about the management of that company. I hope First Majestic lets it go and looks elsewhere for its acquisition strategy. However the emergence of a legitimate trumping bid for a takeover is big news in my opinion and could be the start of a recovery for this sector.
Cheers!