China-controlled gold company Shandong Gold Mining Co. Ltd. is paying $207.4-million to buy TMAC Resources Inc., the latest struggling Canadian junior miner to be swept up by a larger and better capitalized firm.
The deal will be one of the first scrutinized by the federal government after it recently tightened its oversight of acquisitions of Canadian firms by foreign-owned entities.
Shandong is paying $1.75 a share in cash for TMAC, 4.2 per cent above the Thursday close on the Toronto Stock Exchange, but more than 70 per cent below its IPO price.
Toronto-based TMAC is the third underperforming Canadian gold company to be acquired in the past few months at a fraction of its peak market valuation. Guyana Goldfields Inc. was recently acquired by Silvercorp Metals Inc. while Semafo Inc. was bought by Endeavour Mining Corp.
Founded by veteran mining entrepreneur Terry MacGibbon, TMAC operates the Doris gold mine in Nunavut’s Hope Bay, some 160 kilometres above the Arctic Circle. The mine, which went into production in 2017, has grappled with myriad operational issues; hundreds of millions of dollars are needed to address its problems. With the company recently pushing out its debt obligations, it was clear it was in no position to address them.
“It would seem this is the best deal TMAC could get ,” said Barry Allan, analyst with Laurentian Bank Securities in a note to clients.
“With the prospect of more than $600 million of capital [in] reinvestment to build a new mill and complete additional underground development, there was likely limited appetite for this degree of risk.”
Shandong Gold is 47-per-cent owned by the Chinese government. Various subsidiaries of Shandong own about another 10 per cent of the equity.
The acquisition is subject to a review under both the Competition Act, and the Investment Canada Act (ICA), according to which Shandong must prove the deal provides a net benefit to Canada.
Among the positives espoused by Shandong is its deep pockets.
Shandong said on Friday that it will be able to fund an expansion of the mine, if the economic case can be proven. It is also providing an immediate US$15-million in financing to TMAC through a private placement.
The acquisition of TMAC by Shandong comes as Ottawa tightens its scrutiny of Canadian takeovers by foreigners.
Last month, the Liberal government said they will subject "all foreign investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to, or subject to direction from foreign governments, to enhanced scrutiny.”
While the acquisition of TMAC by Shandong has been welcomed by the Canadian firm’s biggest shareholders, including Newmont Corp., and endorsed by its board, a First Nations stakeholder has yet to sign off on the deal.
Stanley Anablak, president of the Kitikmeot Inuit Association, said in a statement on Friday that it will conduct its own due diligence to make sure the deal meets its criteria, which includes protecting and promoting “the social, cultural, political, environmental and economic well-being of Kitikmeot Inuit.”
TMAC went public in 2015 at $6 a share, raising $155-million from public investors. In a little more than a year, its stock more than tripled to $19 a share. But Doris never lived up to its promise, with the mine consistently producing less gold than expected and at higher costs.
In early 2018, TMAC recruited BMO Nesbitt Burns mining banker Jason Neal as its chief executive. He took over from Mr. MacGibbon, who had handled the duties on an interim basis after the departure of Catherine Farrow, the company’s founding CEO.
Mr. MacGibbon was best known for starting copper producer FNX Mining Co. Inc. in the early 2000s and growing it into a multibillion-dollar entity.
TMAC has not followed a similar trajectory.
Weighed down by persistent operational problems, including an unexpected power outage that hurt production late last year and the mill at times running at only half capacity, Mr. Neal put the company up for sale earlier in 2020.
While shares in TMAC have drastically underperformed in comparison with its peers over the long term, the stock ran up precipitously right before the deal was announced. On Thursday, TMAC spiked almost 16 per cent under heavy volume with no material news.
“We know of no specific reasons why there was an increase in volume, or our share price,” Lisa Wilkinson, VP, investor relations and strategic development wrote in a statement to the Globe and Mail.
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