Only two weeks after the federal government blocked a takeover of struggling Nunavut gold miner TMAC Resources (TSX: TMR) by China’s Shandong Gold Mining, TMAC has found itself in the arms of a Canadian white knight – Agnico Eagle Mines (TSX: AEM; NYSE: AEM).
On Jan. 5, Agnico announced a friendly bid for TMAC of $2.20 per share – 45¢ per share higher than the $1.75 per share Shandong had offered. The offer represents a 66% premium to TMAC’s 20-day, volume-weighted share price as of Jan. 4.
As part of the deal, the gold major will also retire TMAC’s outstanding debt and deferred interest and fees. TMAC’s single producing asset is Hope Bay, in northern Nunavut, 125 km southwest of Cambridge Bay. The operation has underperformed since first gold was poured in 2017, requiring TMAC to make investments to improve the mill and increase its capacity to 2,000 tonnes per day from 1,000 tonnes per day.
The deal would put the asset in the hands of an experienced miner who already has a large presence in Nunavut. Agnico currently operates the Meadowbank complex and the Meliadine mine in the territory.
“We are very pleased to have the opportunity to bring our extensive northern operational and community experience to the Hope Bay mine and the Kitikmeot Region of Nunavut,” Sean Boyd, Agnico’s CEO, stated in a news release. “Together with the TMAC team and our Nunavut partners, we look forward to advancing exploration and expansion initiatives to realize the full potential of the mine and its large unexplored land package.”
TMAC president and CEO Jason Neal noted the acquisition by Agnico was a positive outcome for all stakeholders.
“Our company spent almost the entirety of 2020 under the uncertainty of a strategic review process and the Canadian government review of the sale to Shandong, with an impending debt maturity, compounded by the anxiety of the global pandemic,” he stated in a news release. “The acquisition being completed by Agnico Eagle is a great outcome for all stakeholders. Agnico Eagle is one of the strongest gold producers internationally, a Canadian champion and has been operating in Nunavut for more than a decade with a great track record with communities, employees and the environment.”
The transaction, which is being done as an assignment to Agnico of the arrangement agreement with Shandong from May 2020, is expected to close by Feb. 8.
It has the support of major shareholders including Resource Capital Funds, Newmont (TSX: NGT; NYSE: NEM), Shandong and TMAC directors and officers, who collectively hold 62.3% of the company’s shares.
“This is a very clean, Made in Canada solution that solves TMAC’s near-term hurdles,” Laurentian Bank mining analyst Barry Allan wrote in a research note to clients.
He also expressed confidence that Agnico will be able to turn Hope Bay around, “unlock the extensive value of the Hope Bay greenstone belt and ultimately demonstrate the acquisition of TMAC Resources to be very accretive to Agnico shareholders.”
While TMAC has already made investments in Hope Bay, a prefeasibility study released in March 2020 pegged the cost of necessary upgrades to the operation, including a new 4,000 tonne per day processing facility to replace the current 2,000 tonne per day mill, at $683 million.
Under the deal, Agnico will also assume TMAC’s liabilities of around $170 million.
The generosity of the offer – $286.6 million in terms of equity value, versus $149 million under the Shandong bid – and the fact that it was made in cash may be a recognition of the current scarcity of gold assets in a high demand environment.
Allan noted that the all-cash offer allows Agnico the flexibility to sweeten its bid, if required.
“While no other mining company has the expertise of Agnico in Canada’s high North, we recognize the industry is currently flush with cash flow and is devoid of investment alternatives,” he wrote.
Hope Bay holds reserves of 16.9 million tonnes at 6.5 grams gold per tonne for a total of 3.5 million ounces.
The federal government ordered a national security review of Shandong’s offer for TMAC in October, several months after TMAC shareholders had approved the bid, originally made in May 2020. The deal drew federal scrutiny amid heightened tensions with China, and because of the Hope Bay project’s strategic location just a few kilometres away from the Arctic Ocean. The government rejected the deal in December.
Mining analyst Farooq Hamed who covers Agnico for Raymond James, said the gold miner is likely looking at Hope Bay as a development asset it can tuck into its pipeline at a “reasonable cost of ~US$100/oz. of 2P reserves and ~US$67/oz. of M&I resources.”
“While Hope Bay is a current producing asset (producing ~130,000 oz. per annum to 2023), we would expect AEM’s interest in the asset is based on a larger production profile, ultimately above 300,000 oz. per annum where the company has previously indicated that projects in Nunavut need to be to have the scale to be economically viable,” Hamed wrote in a research note. “As a result, we think the recent Hope Bay PFS (March 2020) that includes a new mill and production expansion to ~250,000 oz. per annum starting in 2024 with capex of ~700 million may not be the ultimate outcome for Hope Bay in the hands of AEM.”
“Given our view that the development of Hope Bay under the control of AEM could undergo a “re-think,” we expect AEM would follow up with an extensive exploration program to understand the growth potential of the Madrid and Boston deposits, where the majority of the reserve/resource sits, and how that would relate to mill size and placement given the distance between the two deposits.”
Carey MacRury, an analyst at Canaccord Genuity, described the transaction “as a small bet for Agnico on the optionality of ~7Moz of resources in a jurisdiction the company knows well,” and pointed out that the $287 sticker price “represents only 1.2% of Agnico’s market cap.”
“We believe Agnico will look to completely reset the project with the time, capital, technical skills (and patience) to rethink the project’s configuration,” the analyst commented in a research note, adding that the company is the largest operator in Nunavut and “can leverage its logistics capabilities, which are critical to operating in the region given annual sealift constraints.”
MacRury also pointed to the “significant exploration potential” on TMAC’s land package and its location on “80 km of largely underexplored greenstone belt.”
This article first appeared in the Canadian Mining Journal, part of Glacier Resource Innovation Group.