M&A Picking Up in Safe Jurisdictions

M&A activity is alive and well for gold companies in Ontario and Quebec. Earlier this week Goldcorp (GG) announced its intent to acquire Probe Mines (PROBF) in an all stock deal that valued Probe at C$ 5.00/share or C$526 million. Probe's stock is currently trading at C$ 5.30/share, suggesting that investors think a higher bid could be coming. Other mid-tier and majors in the area include Barrick Gold (ABX), AuRico (AUQ), Hecla (HL), Yamana (AUY), Argonaut (ARNGF) , Iamgold (IAG), Agnico Eagle (AEM) and Osisko Gold Royalties (OKSKF). On January 21st, Osisko announced a C$200 million capital raise. Speaking about capital raises, gold company financings in Canada in just the past week include Lydian International (LYDIF) for C$16.5 million, Asanko Gold (AKG) for C$40 million, Primero Mining (PPP) C$75 million in convertible notes, Detour Gold (DRGDF), C$141 million, Richmont Mines (RIC), C$34 million and Romarco Minerals (RTRAF), C$300 million.

Increasingly, it appears that gold companies are stepping back from exotic locations in moderately to highly difficult jurisdictions to conduct business. Instead, North America is the place to be, especially in Canada. Osisko in particular making further acquisition(s) in Quebec makes sense. In November, 2014 Osisko acquired Virginia Mines' (VGMNF) Quebec property in an all stock deal valued at C$508 million. Is C$500 million the new sweet spot for Canadian gold company transactions? Given recent M&A activity, it's reasonable to look at other companies that could be compelling takeout targets.

Falco Resources Looking Especially Interesting

One such company is Falco Resources (FPC.V) / (OTC: FPRGF). With a market cap roughly 1/10 that of the two other recent deals, Falco is in many respects an ideal target. Falco is one of Quebec's largest mining claim holders with over 740 square kms of the former Noranda mining camp, including 14 former producing mines. The camp has historic gold production of 19 million ounces of gold and is the last Abitibi gold camp which is not controlled by a major gold producer. Falco boasts a maiden 43-101 Inferred resource, obtained largely from Noranda's historical data, containing 2.8 million gold equivalent ounces.

Strong Management and Board a Vote of Confidence

Further, the profile of Falco's board and management team is unlike most junior mining companies, as it's made up of people who have built and operated some of the most successful mines in the Abitibi, including Agnico-Eagle, AuRico Gold and Osisko. I think it's a tribute to the quality of Falco's assets that it has been able to attract this magnitude of talent and experience. [Please see January Corporate Presentation].

Why am I singling out Falco as an ideal target vs. other junior gold companies? For one very important reason. Last week, Osisko announced that it has filed an early warning report in connection with the 10,707,255 common shares of Falco Resources held by Osisko. Osisko has expanded the purposes for which it may continue to hold the Falco shares, and determined that, in addition to investment purposes, it may use the Falco shares for purposes of influencing the corporate, managerial and strategic policies of Falco. To sum it up, Osisko is known to be acquisitive, it already owns 11% of Falco, it has explicitly stated its intention to be more aggressive with regard to Falco AND it just raised a war chest of C$200 million.

How to Value Falco — No Easy Way

In trying to value Falco Resources given what Goldcorp is paying for Probe Mines there are some key takeaways, but no clear answer. For example, Falco is one of Quebec's largest mining claim holders with over 740 square kms, a much larger landholding than Probe's. That massive property would be attractive to a larger company with greater financial resources, a lower cost of capital and the ability to fast track Falco's main project.

Most important, there are 5 nearby mills, all within easy reach of Falco's project. In fact, there's a rail load out nearby and Falco is no more than 50 kms by rail from those mills. By comparison, Probe's main project is 160km by truck to Goldcorp's mill. Falco is shooting for 5 million + Measured, Indicated & Inferred gold equivalent ounces by year-end. This is speculative in nature because the company only has a 2.8 million ounce Inferred resource to date. However, it should be noted that Falco has 80 years of Noranda's drill data and 14 past producing mines are on Falco's property. Therefore, if Falco can book 5 million or more ounces, that would be a larger resource than that of Probe's.

Is Probe Mining Worth 10x that of Falco Resources?

I may be getting ahead of myself. To be fair, one could assume that Falco is 1-2 years behind Probe in building a mine. That's the main difference, and Probe has a higher average gold grade than Falco's still respectable 3.4g/tonne. Still, is that worth paying 10 times the valuation for Probe vs. Falco? I think the Probe deal has placed a huge for sale sign on Falco and that a number of prospective buyers are kicking the tires. The reason why Probe was acquired and not Falco is probably because as I mentioned, it's 1-2 years ahead of Falco in terms of initial production.

Falco Working on Updated Resource Report and PEA

Make no mistake, the currently lower inferred resource and the earlier-development stage profile make Falco more risky, but with the gold price up to $1,300/oz, there's considerably more margin for error than with gold below $1,200/oz. Perhaps what it will take to get suitors off the fence is for Falco to update its resource (moving to Measured & Indicated ounces, not just Inferred), and then for the company to deliver a Preliminary Economic Assessment, "PEA," a few months later. This should be accomplished within 12-18 months. However, with each month that passes as Falco advances towards these meaningful de-risking events, the higher the price tag on the company.

Gold companies around the globe are cutting cap-ex and exploration, yet their mines are depleting each year. Buying Falco Resources would be a tremendously valuable call option on the price of gold and a way to replace depletion in coming years. If the gold price increases this year and/or M&A activity continues to pick up, potential suitors may want to acquire Falco to block peers from doing so. That's what happens in a better market for juniors. In the meantime, Falco has $12 million of cash, so suitors can't sit by and wait for Falco to run out of cash. All roads lead to a takeout of Falco in 2015 or 2016.

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