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

By Otto Rock

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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Gary

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