Sandstorm Gold in Race for AuRico Metals

AuRico’s insiders aggressively buying stock in recent weeks, royalty clause acts as “poison pill”

Sandstorm Gold is in the race for royalty assets held by AuRico Metals, according to separate sources with detailed knowledge of the situation. Osisko Gold is also eyeing the royalties, promising competition for assets new to the market.

Trading in AuRico Metals only began this month, after the company was spun-out of a $1.5bn merger between Alamos and AuRico Gold.

Its core asset is the Kemess copper-gold project in British Columbia, but AuRico also holds royalties over the Young-Davidson gold mine in Ontario and two gold mines in Australia, owned by Vancouver-based Newmarket Gold.

Nearly a third of AuRico’s stock has changed hands in the last two weeks, whilst its share price has swung wildly.

The unusually heavy volume is partly attributable to equity funds being forced to sell holdings, because the new company’s sub-$100m market cap falls below their investment mandates, but would-be buyers of the company say AuRico’s volume also signals an aggressive corporate manoeuvre.

Sore Thumb

“There’s so little trading in gold stocks at the moment,” one executive says, “the volume in AuRico stands out like a sore thumb.”

Osisko’s house bank, National Bank of Canada, is believed to be leading the buying. Sandstorm Gold’s chief executive Nolan Watson is also seen as keen to acquire royalty cash flow and is sitting on a $100m undrawn credit facility. The market for royalties has meanwhile become so competitive and well established in recent years that few can change hands without being shopped around.

AuRico is open to “monetizing” the assets, according to sources involved in the process, and could add a royalty over Kemess to the portfolio to bulk-up its sale value. But with Sandstorm and Osisko both circling, legal clauses embedded in the assets may dictate the final terms of any deal.

“Everyone wants to create an auction,” one source says.

Poison Pill

Two clauses look set to play a pivotal role. Young-Davidson is due to produce over 160,000 gold ounces this year and boasts a 3.8m ounce gold reserve, but Alamos has a right to repurchase the royalty, AuRico’s largest single source of revenue, if it changes hands in the next 18 months.

Sources in the middle of due diligence on AuRico describe the structure as a “poison pill”, designed to deter a hostile takeover, but critically, the clause is not triggered if AuRico voluntarily sells the asset, allowing it to auction its royalty portfolio.

Executive chairman Scott Perry is believed to have a good relationship with Osisko’s chairman Sean Roosen, but the two parties have not held talks.

Newmarket Gold

A second clause may play an important role. Information surrounding AuRico’s Australian royalties, which cover the Stawell and Fosterville gold mines in Victoria, is redacted from the company’s filings on the grounds that it is “commercially sensitive.” They are subject to a right-of-first-refusal, however, held by Newmarket Gold, which bought the mines in May.

Newmarket’s quarterly results, released last week, show the mines are running at full tilt, producing nearly 40,000 ounces in the last 3-months. Yesterday, the company also reported drill results from Stawell including 7 grams per tonne over 18m.

But if Newmarket can successfully argue that AuRico’s spin-off constituted a change of control, it could buy back the royalties for $18m, equal to a fair value assessment earlier this year, according to industry sources involved.

Bargaining

If the spin-off legally constitutes an “affiliate transfer”, as AuRico’s filings suggest, Newmarket is unlikely to match any offer by Sandstorm or Osisko, insiders believe, waving a transaction through.

Newmarket, which counts World Gold Council chairman Randall Oliphant on its hard-hitting board, has therefore gained an important seat at the bargaining table, with bidders for AuRico’s assets keen to ensure they are not bogged down by the threat of litigation.

Newmarket declined to comment, but is monitoring the situation closely, Master Investor understands.

AuRico’s insiders, including chairman Scott Perry and chief executive Chris Richter, have meanwhile bought 2.6m shares in the company this month, equal to more than 2 per cent of its stock, at prices ranging between C$0.48 and C$0.74.

AuRico last traded at C$0.49, defying a plunge in the gold price on Monday. 118m shares are outstanding, valuing the company at C$58m ($45m).