Ramelius in exclusive due diligence to buy Karora

Money of Mine podcast boys discuss the RMS move on Karora Resources - 07-March-2024

Update: I sold out of RMS (from my SMSF) on Monday 11th Feb 2024, so I no longer have any direct exposure to RMS. I had also previously held them here but sold that position either last year or the year before. I have not turned bearish on RMS, I just don't think they are currently among my very best ideas in their industry (gold) at this point in time, and that is mostly around not knowing how this latest M&A (with Karora) will pan out. I do often get a bit jumpy when companies make largish acquisition bids for other companies and I can't see the obvious upside in the M&A, hence selling out of ABB (Aussie Broadband) at $4.62 ($4.615 average) on the morning they announced their bid for SLC (Feb 26th), a bid that will clearly not go ahead now. ABB closed at $3.55 yesterday (Friday 15th March), so 23% below my exit price. I explained my reasons for selling ABB here.

@mikebrisy explained his reasons here (you might have to scroll down, the straw is titled, "#Divestment Decision") and subsequent comments on that straw can be found here.

I didn't know the Origin thing was going to occur of course, but I did know that from the scant (2 pages of) info that ABB provided to the market in relation to why they thought buying SLC was a good idea, I remained unconvinced that it was, and it seemed like a very opportunistic move based on ABB's big SP pop (+18.59%) on the previous trading day when they released their H1 report. I have also long thought that SLC was an inferior business - i.e. low quality, and with some internal management issues over the years, and I thought that Bevan Slattery, the founder of the business, quitting the SLC Board in 2021 and selling completely out of SLC was a fair indicator that he saw better opportunities in the market himself, and as the company's founder and previous executive Chairman, he of all people should know.

In short, I liked ABB. But I did not like SLC. And I did not like the idea of ABB buying SLC, particularly just a week after their previous acquisition (of Symbio) had settled (the scheme became legally effective). And I can't afford to fall in love with any company. You have to be prepared to exit immediately when you smell trouble, so I did with ABB on the day they announced that SLC bid.

With RMS it took me a weekend to think about it, and then I sold out on the Monday, mostly because the Karora gold assets just aren't close enough to those gold deposits and/or gold mines/mills that RMS already own, so the obvious synergies weren't there. It became obvious to me that this particular M&A (with RMS) was much more about getting some gold assets with longer mine lives than those already held by Ramelius, and my thoughts then turned to the timing, and I figured that this was probably a bad time to be buying good gold assets - with the gold price making new all time highs on a regular basis, particularly buying a company that is actually doing OK, they're not in distress, and they've not been trading (on the TSX) at particularly cheap levels. Anyway, with the deal still being negotiated and very little info to go on, I thought it best to step aside and watch RMS from the sidelines until everything is much clearer.

I should add - that I'm generally a lot happier when I'm holding the target company in this sort of situation (M&A). I am a lot more comfortable holding the target company than the company that is making the bid to takeover another company, unless the company being taken over is a relatively small acquisition that is either a bolt-on or otherwise has clear strategic value.

Anyway, just thought I'd update this thread to show that unlike what I had previously stated, I actually do NOT hold RMS shares now.

I do hold two companies currently that are under takeover offers from other companies, one is ALU and the other is GNX, and in both cases the potential acquirer is a Japanese company that has lobbed in a bid that has (1) got the target company's board onside and willing to recommend the offer to their own shareholders in the absence of a superior offer, and (2) is priced sufficiently high enough that they are unlikely to get involved in a bidding war with anybody else because at those prices everybody else is likely to not want to get involved. This seems to be a feature of Japanese thinking in recent years, longer term thinking in terms of investment horizons, and also preferring to avoid any sort of conflict by making their best offer up-front and not having to deal with any competition for the asset they want to buy. Simple and clean. I like it a lot.

25-Sep-2024: Update: And, again, I need to update this one. Having bought back in to Ramelius Resources (RMS), then selling back out in February '24 when they made the move to buy TSX-listed Karora Resources - I have since bought back in. Plenty has changed, but mostly Ramelius walked away from the Karora deal - see here: https://www.reuters.com/markets/deals/australias-ramelius-resources-ends-buyout-talks-with-karora-resources-2024-03-28/ after their A$700 million to A$1 billion deal got scuttled by Westgold Resources (WGX) who ended up acquiring (or merging with) Karora for A$1.23 billion (US$808 million) with the aim of becoming a mid-tier gold miner producing around 400 Koz of gold a year with a market capitalization of around A$2.2 billion (See here: https://www.mining.com/web/westgold-to-buy-karora-resources-in-808-million-deal/). WGX's market cap has since risen to $2.59 Billion. RMS's market cap is now $2.52 Billion, without having to buy Karora.

And Ramelius look great at this point. Cashed up. No debt. Very profitable - one of the lowest cost gold producers in Australia - among the 4 lowest cost producers with any scale (that is the mid-tier through to the largest players in the Aussie gold industry), and that includes Evolution Mining (EVN) who wouldn't be low cost at all without their copper production being used as byproduct credits to reduce their gold production costs.

RMS are disciplined with their M&A - not afraid to walk away from a deal if someone else wants to overpay. And Westgold clearly needed a big acquisition more than Ramelius did.

I expect RMS to get involved in further M&A - they have the cash and the undrawn credit facilities to fund it, but I expect them to be smart about it, just like they were smart to walk away from Karora. They can make smaller and cheaper acquisitions and also grow organically, as they have been getting great bang for their bucks from their drilling - finding plenty of gold, most at good grades, within their existing tenements and close to their existing mills. They are not just a growth-via-acquisition company. Far from it - they have really turned around some of their operations by significantly reducing costs and increasing production, and they are mining good grades of gold, which always helps.

Another thing about RMS is that they are NOT having grade reconcilliation issues between what their plans say is in the ore (grams of gold per tonne of ore) and the gold that their mills are producing, so their mine plans are on the money - they have done enough drilling and sampling to know exactly what they've got and where it is, in terms of the ore in their current mine plans. In terms of extension drilling to see what else they've got in their tenements, like I said, that has been returning some excellent results also.

There's very little going wrong for Ramelius at this point, and they aren't one of the goldies that people immediately think of when they think of the major players across our Aussie gold sector - so I saw value when they were below $2, and I bought a decent position in my two largest real-life portfolios in July and early August - and I posted here about why (in August and September) - see here: https://strawman.com/reports/RMS/Bear77

So - yeah, just read my previous comment that I'd sold out of RMS - and yes, I did, but after they proved they had good M&A discipline AND that they were one of the best performing gold producers on our market in terms of operational performance and profitability, I bought back in.

In my SMSF, I trimmed some of my Northern Star Resources (NST) position @ $16.08 on Monday this week after they hit an all-time high of $16.20 in early trading on the day and then started dropping steadily (they closed at $16.05 Monday and then at $16.02 on Tuesday (yesterday). As a result, Ramelius (RMS) is now the largest position in my SMSF. It's a smaller position in my other real-money portfolio because it's in that one for the dividend and the trade - that second portfolio is mostly for income, so I'll take the dividend and the capital gain after satisfying the 45-day rule to qualify to claim the franking credits on my tax return - that's already been ticked off actually so I can sell them any time now and still get the div on October 17th. They went ex-div on 13th September and my last tranche was bought back on August 9th. My plan there is to create income through both dividends and capital gains - some of them come sooner than others. I won't sell RMS until I find another opportunity to rotate the money into, because RMS should certainly go higher over time, just not in a straight line.

In my SMSF however, I'm holding them for longer, and will happily trim the position as it rises, as I have always done with my winners, when I don't make the mistake of selling out completely too early.

I finished reading the "The Art of Execution" by Lee Freeman-Shor yesterday while waiting on my "new" computer (my son's "old" gaming computer, which is a lot better than my old PC) to upload all of my old files off a portable HD and then upgrade from Windows 10 to 11 - which took about 3 hours all up (the book took less time than that), and it reinforced what I already knew - that you can't make big money without big winners, and you don't get big winners by selling out for small profits. You can trim a winning position, the connoisseur sipping some of the wine from the cellar but leaving most of it to mature and develop, but don't sell out completely without a good reason, and the amount of profit you've made on paper is not a good reason, unless you need the money of course.

What I got most out of the book was the need to do something when you're down by around 25% to 30% on a position. Either buy more, if you'd buy the stock today knowing what you know now if you didn't already hold any, or sell if you would NOT buy the company today if you didn't already hold it, knowing what you know now. I have quoted that rule here before, and many people have, in various books, but in this one the author (Lee Freeman-Shor) makes it very clear how much worse things tend to get if you do nothing. Don't be a "rabbit" with your losers. And don't be a "raider" with your winners (selling out for small profits).

Real-life examples that involved millions of pounds, dollars or euros (in his book) really does drive those lessons home.

So that's how I mostly play it with my SMSF, but I have a different shorter term strategy with my other "income" portfolio at this point, but that might change earlier than I thought because I got an email yesterday saying that the insurance company had approved my TPD claim (due to having severe OA in all of my joints, but especially in my knees and hands, my hips have already been replaced) and I just need one more signed doctor's form to get the payout released (due to government legislation apparently - but won't be a problem), so I may get to revert to my previous investing strategies earlier than I thought instead of my current very risk-off capital-preservation mode.

Either way, RMS will play a part in my investing future I'm thinking.

Totally agree, which is why I bought into them earlier this year after reviewing the prospects. I only have a 4% position now but will definitely be looking to strategically add more over time.

Its likely that Spartan will be the next logical takeover opportunity given how RMS has a significant stake in the company, unless the price keeps getting driven up well past the $1b mark where it might make sense to leave to another company like WGX who are more desperate for growth. To me it seems a bit odd that the both RMS and Spartan have the same market cap given the very different lifecycle stages and respective CAPEX for profitability.

Is it likely that they will pay up just to keep the growth going, or hope that Spartan keeps burning through cash in early works and comes looking for a deal in the future?

Would be keen @Bear77 to understand if you have seen something similar in the past or if the Karora deal was the same sort of cost/benefit.

My understanding @SudMav is that RMS is still looking reasonably priced - but looked cheap at around $1.90, and Spartan are expensive - similar to what happened to RED (Red 5) - the old RED - before the merger with SLR. RED was overpriced because everyone thought it would have to be bought out by Ral at GMD because of his stated intentions to control the whole Leonora area, and his track record of profitable M&A growth as well as operational excellence when he ran Saracen (which was acquired by NST after Saracen became the 4th largest gold producer in Australia). Ral didn't show any interest when RED shot up and kept rising, and Luke Tonkin at SLR (the muppet) bought them instead via a reverse takeover of SLR by RED organised by Luke and with Luke now running the new company, and he immediately announced a name change to Vault Minerals (Introducing-Vault-Minerals.PDF) and gave himself a pay rise (see here) by increasing the directors' remuneration pool (he's their MD) while also proposing to change the constitution to limit the number of directors to nine, instead of the current 10, which by the way is a resolution that they announced they had withdrawn a couple of days ago due to "feedback" from shareholders and proxy advisers - see here: Red5-Withdrawal-of-Resolution---General-meeting.PDF. That meeting is today (25th September) by the way.

Anyway, point is, GMD showed good M&A discipline by NOT chasing RED at overpriced levels, and I believe that RMS will show the same restraint by not trying to takeover Spartan at these very high levels that SPR are trading at. RMS's 20% stake in SPR (a bee's whisker under 20%) ensures that they get a say in any M&A moves on Spartan, and it's also proved to be a very profitable investment for RMS as well. Spartan, as a company, with their assets so close to RMS's Checkers gold mill as well as Cue (which RMS acquired last year when they took over Musgrave Minerals), would be a good acquisition for RMS, but not at these prices, unless they find a heap more gold, but the thing is, if they find a heap more gold, they will get even MORE expensive.

Musgrave Minerals was taken over by RMS last year - see here: https://mining.com.au/musgrave-ramelius-takeover-nears-full-completion/

Westgold and Vault (Red 5, formerly Silver Lake) are also around that same area however, so Spartan makes sense as an acquisition by all 3 of those companies, if the price is right. And the price doesn't look right at the moment. The most likely would be Vault (RED, i.e. the old SLR) because they have a history of being prepared to overpay for assets.

But RMS has that blocking stake, so it could get interesting.

It all depends on how much more gold Spartan find at Never Never and surrounding land @SudMav - but as they are right now, at this point, they look crazy expensive. I'm happy to have exposure to 20% of them through RMS, but I wouldn't be buying into SPR directly.

Thanks @Bear77 your commentary makes total sense and provides some further rationality behind why they took the near 20% stake in Spartan. I like how it gives them a future capital growth angle with either share price gains or future mining growth. I totally agree with you that SPR right now seems a bit ridiculous from a valuation perspective (i was just too chicken to put it out there in those exact terms). You give me more confident that they will do the right thing and wait for the right deal to come through at the best interest of the shareholders.

I do see RMS getting up near the $2.5-2.75 mark in the short term (pending no significant changes to the gold price) when the cue project CAPEX is behind them and the mine is producing positive revenue with revenue somewhere near $230m NPAT.

Yeah @SudMav - spot on with that analysis. Capex is reducing this FY for RMS, and their SP should get up into the mid to high $2s as you say, as long as the gold price holds up. I've just updated that previous post of mine in this thread as I've noticed that the map there has the Cue GP (gold project) still owned by Musgrave, but Musgrave was taken over by RMS last year.

Here's a map that is current from the Spartan website today:

Source: https://spartanresources.com.au/operations/

So Spartan do own some stuff further North as well (all in WA) but it's the Never Never deposit close to their Dalgaranga gold mill that has the market most excited about Spartan. A little too excited for my money. The only thing that seems even sillier in the Aussie Gold Sector (to me) than SPR's price levels is De Grey Mining (DEG) having a $3.2 Billion market cap, and they are not only not producers yet, i.e. they don't produce anything, they also haven't started building the plant (gold mill) at Hemi because they still haven't finalised the debt funding package.

Regarding that, see here: NAIF-Approves-$150M-Debt-Funding-for-the-Hemi-Gold-Project.PDF

Excerpt: "De Grey is targeting the finalisation of documentation for the Debt Facilities in the current December 2024 half-year." (middle of page 1 of that announcement).

Here's where they're at currently:

They won't be producing any gold this year, and if the plant is big enough - and it should be - probably not next year either, because it will take some time to build once they finally get started.

They're always highlighting their progress but despite alll the drilling and all the gold they've found, they're still project developers, and their market cap is larger than all but three (NST, EVN & PRU) of Australia's gold producers - or 4 if you include US-listed NEM (our NEM is a CDI for the US listed Newmont that bought Newcrest last year) - see here: https://www.listcorp.com/asx/sectors/materials/materials/metals-mining/gold

A lot can go wrong between now and production for DEG - not a level of risk I'm comfortable with.

Same with Spartan, although they already have a decent mill (Dalgaranga, built by GR Engineering Services - GNG - who I hold shares in) - so they don't have that level of development risk - Spartan is just so expensive that they would need to find a LOT more gold for their market cap/valuation to make any sense to me.

But, yeah, playing Spartan through RMS is nice - as RMS retain that optionality as you described @SudMav and they're sitting on very tidy profits already with their SPR holding. It wouldn't surprise me to see RMS reduce that position in SPR if they decide it's become super-rediculous in terms of being over-priced - or even sell out altogether, but my best guess is that they'll be in no rush to do that, and they'd likely retain at least a 10.1% blocking stake in Spartan if they did sell down.

I was talking about De Grey (DEG) here two days ago - in this RMS thread - in relation to how overpriced I think they are - along with Spartan (SPR) - and today they released this: Media-Speculation-in-The-Australian-newspaper.PDF

Ostensibly this announcement is to deny the rumour; to state that it is false, but the reality is that it spreads the rumour from just readers of The Australian newspaper and website to everybody - and while DEG clearly haven't received a written buyout proposal from Agnico Eagle Mines, i.e. there is no proposal on the table today, it doesn't mean the speculation is baseless, as DEG, apart from simply stating that they have NOT received a proposal from AEM (listed on the NYSE in the USA and the TSE in Canada), have said that it is their policy to not comment on rumours or media speculation. 

So they could well be in talks with AEM that have not yet progressed to a written offer that needs to be disclosed, or for that matter they could be in talks with a number of parties; we do not know. We do know that with a market capitalisation of $3.2 billion (with a "B", not an "M"), DEG is already too large to be taken over by any Australian listed and Australian HQ'd gold producer except for NST - and Northern Star haven't shown any interest in DEG to date, so if DEG DO get taken over, it would have to be by a large multi-national like AEM who have a market capitalisation of A$63 Billion according to this: https://companiesmarketcap.com/aud/agnico-eagle-mines/marketcap/

The DEG share price hasn't reacted much to this news - or lack of news - being up 5 cents roughly, same as they were before the trading pause and "Nothing to see here" announcement, and still around 5 cents/share below their year high of $1.445 (set intraday on 4-Dec-2023).

There are always rumours, but I don't hold DEG, and I'm not tempted to buy them. As a rule, I don't try to make a quick buck on these M&A situations, because they often don't pan out how you expect they will. And that's assuming there is ANY substance to the rumours published today by The Australian.

I think there likely is some fire there behind the smoke, but I don't know how it will likely play out. DEG still looks expensive to me for a project developer who doesn't produce anything yet.