International Minerals (GM:IMZLF) is a gold and silver mining company with a 40% interest in two mines in Peru, one operating and one under construction. The company also has projects in Nevada and Ecuador. They recently agreed to a takeover from their partner in the mines, Hochschild Mining (OTCPK:HCHDF). Investors in IMZLF will receive $2.38 USD per share, and a share in a new company, Chapparal Mining , for each share of International Minerals they own. At the current share price of $2.80, the cash portion is a significant value realization.
This new company will hold all of International's assets other than the Peruvian mines, including approximately $58 million of net current assets (cash and receivables). The major assets of Chapparal Mining are in Nevada.
The transaction is highly likely to close, although it still requires shareholder approval from both parties. International Minerals shareholders have been long suffering, and this deal allows them to monetize a significant portion of their investment. Hochschild Mining shareholders are likely to approve the deal due to the significant synergies. Hochschild already owns the majority share of the Peruvian mines, and will not incur any additional overhead by owning the remainder. In fact, their existing overhead will likely decrease as there will be no expenses related to working with a minority owner of the mines.
From a valuation point of view, the cash received by shareholders is worth face value, and the new company should be worth at least the value of its cash, which will be approximately $0.48 per share. Ascribing no value whatsoever to the new company's mineral leases in Nevada is the most conservative case. This yields a share price target of $2.38 + $0.50 = $2.88. While this small time arbitrage gain is positive for capital preservation reasons, it is not an undervaluation significant enough to make a purchase of the stock a wise investment. This merely demonstrates that a purchaser of the stock at current levels is extremely unlikely to experience permanent capital loss. (Obeying Warren Buffett's first rule of investing).
The new company, Chapparal, will have two primary mining assets in Nevada. These assets are non-producing, but have much larger resource bases than the Peruvian assets the company is selling. As proof, see the company-published graph to the right in their April investor presentation, prior to the takeover. Even before the deal, the vast majority of the company's measured and inferred resources were associated with the Nevada assets. Thus, the shareholders are keeping a significant amount of the long-term upside while receiving immediate cash for the producing properties.
The first Nevada property the new company is likely to develop is the Gemfield deposit. The company completed a feasibility study last summer, showing a 7% after tax NPV of $59 million. This was completed using a gold price assumption of $1350/oz, or approximately 5% higher than the current price. Given these parameters, ownership of the Goldfield deposit is probably worth at least $30 million. A copy of the NI 43-101 compliant report is here, and the results are summarized below:
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The company had an update done June 2013, and the sensitivity to gold price is presented below. Key points from this sensitivity are that the mine earns an 8% return even at $1100/oz gold prices. This provides downside protection to the valuation, and makes it more likely that the company will be able to attract reasonably priced project financing for the mine.
Using a $30 million valuation for the land making up the Gemfield deposit adds another $0.26 to the valuation for the company presented above, suggesting a valuation of $3.14, or approximately 12% upside to the current case. As an open pit mine with a 2:1 strip ratio, the Gemfield deposit is relatively low risk from the perspective of physically constructing and operating the mine. The company also plans to use well established heap leach processing, which should limit metallurgical concerns.
The new company will need to raise additional capital of approximately $75 million to fully fund construction of Gemfield. It is likely that a significant portion of this capital can be raised as project financing, while an equity raise would also be required. This adds reflexivity to the stock, as an improving market for junior miners would improve their ability to raise capital and thereby accelerate the development of the resource. The streaming and royalty markets are also possibilities, and deals for royalty interests are still occurring. Ultimately, this asset is of sufficient quality that it should get financing, but the timing and cost of the financing are factors that will affect the ultimate value. By valuing the deposit conservatively, investors can build a margin of safety into their investment, and achieve an acceptable outcome however the uncertainty around financing is resolved.
The company also has a significant land base in the area surrounding the Gemfield deposit, with significant gold resource. These deposits are considerably more likely to be economic after the Gemfield plant is built, as the processing plant is the majority of the cost. This would provide potential upside to the Gemfield valuation, as additional ore could be run through the same plant.
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These deposits have real value, but I have not included them in the valuation case for the company, as they are many years away from production, and the outcome is uncertain. However, once Gemfield is in production I would expect to see delineation of these resources become the major priority for the company.
The main risk to International Minerals are the closing conditions on the takeover. Based on the massive advantages the deal brings to both parties, this risk should be minimal. In fact, International Minerals shareholders have already approved, and Hochschild's majority shareholder has agreed to vote in favor. The biggest risks to the new company shareholders will own are gold price risk, and construction/financing risk on the Gemfield deposit. Because of the relatively small size (for Nevada) of the project, and the technology involved, construction is straightforward. The major hurdle is likely to be securing permission to relocate Highway 95, which runs through the mine site. This is included in the capital estimate for the project, but may delay construction as approvals are obtained. Not receiving approvals is a low risk, as Nevada is a mining friendly state and the jobs from the mine will be well received.
The final potential upside to International Minerals shareholders is their ownership of the Converse project. With a large (>5 million oz) measured and inferred resource base, the project has the potential to convert the company into a mid sized miner. However, it is a low grade project, which makes it uneconomic at current prices. The best way to value Converse is as an infinite dated call option on gold prices. The company's scoping study estimated a $440 million NPV at 8% if gold prices recover to $1600/oz. While that price level does not seem likely in the near future, the company's fee ownership of much of the lands means they are in no rush to develop. The company has indicated they will hold the project and wait for higher prices. I am not explicitly valuing this deposit, but it does add option value to the stock.
I would expect normal spin-off dynamics to occur in this case, as shareholders who owned International Minerals for the producing assets sell the new shares they receive after the transaction. Thus, investors may wish to buy now to guarantee the current valuation, or wait in hopes of a better entry point appearing after the transaction. That would also be less capital intensive, as the price should be lower by the cash consideration received in the takeover. While even a conservative valuation indicates the stock price should appreciate in the long run, investors may wish to take only a small position now and consider the new company after the takeover, as an even more compelling entry point may be possible.
International Minerals also trades on the Toronto Stock Exchange under the symbol IMZ. Liquidity is better on the Canadian exchange, so those with larger orders may wish to execute their orders on that exchange. Significant risks are inherent in owning securities of junior mining company and OTC securities.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GM:IMZLF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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