Case Study: Buyouts Crystallize Value in the Market

By: Frank Holmes | Mon, Oct 17, 2011
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There's value in the market. That's the message the market is sending through the recent strategic acquisitions in the energy and gold mining spaces.

Last week it was announced that Sinopec, a large Chinese oil and gas company, is purchasing Canadian energy company Daylight Energy for $2.1 billion in cash. The deal was struck at a whopping 120 percent premium to Daylight's share price prior to the announcement and a 43.6 percent premium over the 60-day weighted average price, according to Reuters.

Daylight Acquired by Sinopec

Back in July, the first large-cap company to go discount shopping was BHP Billiton when it purchased Petrohawk Energy for just over $15 billion. The deal, which gives BHP access to the highly coveted shale gas reserves, was struck at $38.75 per share, a 49 percent premium from where Petrohawk shares were trading prior to the announcement.

Petrohawk Acquired by BHP

Not to be outdone, the gold mining sector got into the action when B2Gold announced it was purchasing Auryx Gold in a $160 million cash, all-stock deal. The deal represented a 74 percent premium on Auryx Gold's shares from the previous week's close.

Auryx Acquired by B2Gold

It was also announced that Agnico-Eagle had gained access to promising gold prospects in Mexico via Canada by agreeing to purchase Canadian gold miner Grayd Resource Corp in a $463.5 million deal. At $2.80 per share (Canadian), the buyout represents a nearly 66 percent premium over the trading price prior to Agnico's announcement.

Grayd Acquired by Agnico

The strategy behind each deal is specific to the purchasing companies but all four deals crystallize the inherent value in the equity market. Junior exploration and development companies in both the energy and gold mining sectors have suffered steep declines during the market selloff that began in April.

Large-cap companies in both energy and gold mining must continually replace diminishing reserves. For example, decline rates for oil-producing wells in the Gulf of Mexico can range between 15-30 percent a year and significant investments must be made to keep the well producing, according to BP. Establishing new wells is also expensive. An offshore exploration well, for example, can cost $100-$200 million dollars and that doesn't guarantee it will become a producing well.

In fact, currently the cheapest barrels of oil and ounces of gold aren't in the ground, they're listed on the stock exchange. This is why the smart money, such as the world's largest mining company, is swooping in to pick up reserves at discounted prices. This could just be the tip-of-the-iceberg for BHP. BMO estimates the company will spend between $68-79 billion by 2020 to add unconventional shale assets to the company's mammoth portfolio.

This isn't a new phenomenon in the gold sector. As I explained in The Goldwatcher: Demystifying Gold Investing, the big miners have chosen the express route to increasing reserves by purchasing the known assets of their rivals rather than the heartache and headache of drilling core samples and filling out permit applications.

In addition, higher gold prices have filled the coffers of large-cap companies with plenty of cash. BMO forecasts that the gold mining universe will accumulate $120 billion in cash by 2015 if prices remain elevated.

We think this "takeout potential" creates one of the best opportunities in today's market.

 


Editor's Note: The timing of this piece appears extremely appropriate. This piece was originally published on Friday, October 14 but two additional big mergers have been announced on Monday morning. Kinder Morgan is gobbling up its competition in a $21 billion acquisition of El Paso Corp. At a 37 percent premium to the 20-day share price, the deal is the second-largest M&A of 2011 behind AT&T's purchase of T-Mobile, according to Reuters.

Also, it was announced this morning that Brigham Exploration is being acquired by Norway's Statoil ASA for $4.4 billion. The deal was struck at a 40 percent premium to current Brigham share prices.

These two acquisitions represent the sixth and seventh takeouts of the year in the energy space, underscoring how the market has tremendously discounted the value of smaller energy companies.

For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel at www.youtube.com/USFunds.

The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of 9/30/2011: Agnico Eagle, BHP Billiton, AT&T, El Paso Corp, Grayd Resources.

 


 

Frank Holmes

Author: Frank Holmes

Frank E. Holmes
Chief Executive Officer
Chief Investment Officer
U.S. Global Investors

Frank Holmes

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron's, The Financial Times and other publications.


Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

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