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Eye on Equities

Gold producer Semafo seen vulnerable to a takeover Add to ...

Merger and acquisition fever in the precious metals sector shifted into high gear early last month following Newmont Mining Corp.'s takeover of Fronteer Gold Inc.

There hasn't been a lot of M&A activity since, but with gold prices getting back near all-time highs and large producers hungry to build up reserves, it's still a sector that appears poised for further consolidation.

If you're placing bets on who may be the next company to be snapped up, Desjardins Securities Inc. analyst Brian Christie suggests considering Semafo Inc. , which this week reported earnings and cash flow in line with Street expectations.

A key reason: the stock has sold off significantly since late December, when it peaked at just above $14. It's trading a little below $9 today.

The company reiterated its 2011 guidance this week, forecasting production of 238,000 to 263,000 ounces at a cash cost of $540-580 an ounce. Meanwhile, it has allocated significant capital to exploring its Mana and Samira Hill projects in west Africa. "This work should result in increased reserves and resources and strong news flow through the year," noted Mr. Christie.

Also notable: the company's board this week approved a shareholder rights plan to protect against any future unsolicited bid. (Semafo did state, however, it was not adopted in anticipation of any pending takeover bid.)

"We still believe that exploration will ultimately support our future expanded production scenario. Given the recent selloff, we also believe that Semafo could ultimately be a takeover candidate," said Mr. Christie, who rates the stock a "buy" with a price target of $14.75.

CIBC World Markets Inc. analyst Cosmos Chiu agrees that the stock is undervalued. Semafo now trades at a multiple of 1.6 times price-to-net-asset value, lower than the group average of 1.7 times, and its lowest multiple in over a year.

"We believe SMF shares should not be trading at a discount to the group," said Mr. Chiu, who believes the company's production ramp-up to an annual rate of 450,000 ounces by 2014 is achievable.

He rates the stock as a "sector outperformer" with a price target of $18.50.


Polaris Minerals Corp. , which develops construction aggregate projects in North America, this week reported disappointing earnings and sales and advised of a further delay in the sale process for its freehold land at Pier B in the port of Long Beach in California.

Given this delay, "operating performance and market conditions are once again the major near-term liquidity risks, and Polaris may once again need to secure some form of bridge financing prior to the closing of the land sale," said Canaccord Genuity analyst Gary Lampard.

Downside: Citing the heightened liquidity risk, Mr. Lampard downgraded the stock to a "hold" from "speculative buy" and lower his price target to $1.40 from $1.85.

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