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10/4/17

From IKN437: "Leagold (LMC.to): WWWB? (What Will Woodyer Buy?)"

Here's a piece that formed part of IKN437, out last Sunday evening, that muses on what targets Neil Woodyer has in mind for his new toy Leagold (LMC.to). Interestingly, since this was published (2.5 trading days ago) Guyana Gold (GUY.to) is up 10.3% and Argonaut Gold (AR.to) is up 8.6%. But that's probably just coincidence, innit guv? After all, nobody takes IKN seriously.

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Leagold (LMC.to): WWWB? (What Will Woodyer Buy?)
In the last two weeks, the question in that title is one that I’ve spent time and conversations on. It’s about narrowing down the potentials for M&A activity too, because although I’m in no hurry to buy into Leagold (LMC.to), the company originally formed to buy Los Filos from Goldcorp (GG) last year, if we can identify the next things on the shopping list for LMC there’s money to be made.

The background is as follows: Now that LMC is off and running with Los Filos (e.g. announcing a few days ago the first part of the underground development program it will need to get the underground project at the mine working) it’s clearly looking further afield. In recent days its CEO Neil Woodyer has confirmed to the market that LMC will adopt a “build and buy” strategy similar to the one he used to great effect at Endeavour Mining (EDV.to) in West Africa. Also, a little over two weeks ago at a meet and greet lunch at BMO he was heard saying that LMC planned to buy “in LatAm” for its next purchase, with acquisition number three “in Guerrero”, the province where Los Filos itself is located. That little lot gives us clues, as does the M.O. Woodyer used to build EDV.

  • Although other metals aren’t out the question, this company is obviously a project with gold in mind.
  • LMC is the LatAm version of EDV. The formula works, it’s lather/rinse/repeat time.
  • EDV bought late-stage projects, mines working sub-optimally, or companies with balance sheet pressure (subsequently alleviated by share placements) (also see how Crocodile Gold transformed itself and was bought out…same plan).
  • EDV has at least two purchases in mind, even as it progresses with Los Filos.

I don’t want to make this a long-winded piece, so let’s get straight to the point. I’ll be very interested to hear what other ideas or suggestions you out there might have for potential targets, but after due consideration and plenty of chinwag with a range of contacts, here are my three calls as logical contenders. Two are best fits, one is a possible alternative.

For next purchase: Best call Argonaut Gold (AR.to). Argonaut (AR.to) has the right mix: It’s an operator, it’s in Mexico (same as Leagold), it’s been woefully run over the years and its assets are in need of a shot in the arm. After a string of bad purchases which AR refuses to write down, it currently runs a book value of U$627m, so considering that its operations turned a minor profit in Q2, just considering its market cap of approx U$347m (CAD$1 = U$0.80), the price/book of 0.55X points us at one dysfunctional company that could do with a new broom. Its market cap is roughly equivalent to LMC’s at the moment too, so it would work on a “merger of equals” marketing frame.

For next purchase: Possible call Guyana Goldfields (GUY.to): If it weren’t for the fact that GUY is 1.5X the market cap of LMC at the moment, this would be my prime choice. As things are, it might be too much of a reach at the moment. GUY operates the Aurora mine in Guyana and had a problematic Q2, which along with a piece of minor bad news about Q3 recently has seen its share price drop quite sharply. Again a producer, again a great fit, GUY also has some financial debt on board which weighs on its bottom line results and that’s a fit for the Woodyer model, too. However, in order for this one to be a live possibility we’d need to see its PPS climbing first because no board in its right mind sells out at lows unless under serious strain.

For subsequent purchase: Alio Gold (ALO) (ALO.to): After hearing recently that LMC planned to buy its next thing outside of Guerrero before buying again inside, I put a potential spec on hold. But it’s only on hold, because if the circumstances pan out it’s my most likely buy of the three. Alio Gold (ALO), previously known as Timmins Gold and owner of the Ana Paula project in Guerrero as well as the San Francisco operating mine in the North, is the only one that truly fits (Torex is way too big, nothing else there has the advanced project status Woodyer would require). At a market cap of C$190m approx, it’s the right size too. Another potential synergy is that if (repeat IF) LMC does a deal with Argonaut, the San Francisco operation would fit right in with the AR assets, geographically close and with obvious cost benefits for the larger corporation.

Bottom line: We know LMC plans to repeat the EDV model, be aggressive and build something with specific gravity in LatAm in the same style as EDV has in Africa. It’s always tough to second-guess M&A targets, but on consideration I think there’s a chance that the first target will be Argonaut. I don’t plan to trade that myself, it’s a little too much like trying to convince myself I’m right. However, once LMC jumps and makes its purchase, it would then make all the sense in the world to take a long position in Alio Gold, first because LMC’s plans were then off and running, second because LMC wants something else in Guerrero as purchase number three and ALO is the only thing that truly fits the bill. If the second purchase (i.e. Los Filos is number one) turns out to be Argonaut that would just add more conviction to my ALO thesis, as San Francisco would fit into the plans more closely.

But one thing is sure: It’s not guesswork or conjecture as to whether LMC will go the M&A route, it’s a case of when. CEO Woodyer has not hidden the corporate strategy and the roadmap looks very similar to the previous EDV success. The only issue is the timing.