On May 31, Dundee Precious Metals Inc. (TSX: DPM) surprisingly (at least to us) announced it is acquiring INV Metals Inc. (TSX: INV) via an all stock transaction. Shareholders of INV Metals will receive 0.091 shares of Dundee for each INV share they own, which implies an INV takeover equity value of around $120 million.
Dundee owned a 23.5% stake in INV prior to this announcement, so it is effectively issuing about $92 million (76.5% x $120 million) of new equity to acquire INV.
Dundee operates mines in Namibia and Bulgaria and is developing projects in Bulgaria and Serbia. By comparison, INV Metals is developing the Loma Larga Gold-Copper-Silver Project in southern Ecuador. While Loma Larga seems to have good economics — a March 2020 Feasibility Study estimates an after-tax present value of US$454 million based on a 5% discount rate and US$1,400 per ounce gold prices — and Ecuador is generally considered a mining-friendly country, it is difficult to see the synergies that Dundee would gain from developing properties now on three continents.
INV hopes to complete Loma Larga construction in 2022 and begin production late that year.
Dundee’s flagship asset is its 100%-owned Chelopech underground copper-gold mine in west-central Bulgaria, about 70 kilometers east of Sofia, that nation’s capital. In 2020, the mine produced 179,000 ounces of gold and 36 million pounds of copper. Chelopech’s remaining mine life is about eight years.
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Dundee Has A Solid Balance Sheet and Generates Significant Cash Flow
As of March 31, 2021, Dundee had about US$176 million of cash and no debt. Dundee’s cash balance totaled only around US$10 million on March 31, 2020, but the company generated an average US$45-50 million of operating cash flow per quarter over the last four reported quarters, which allowed its cash position to reach the current level.
| (in thousands of US $, except for shares outstanding) | 1Q 2021 | 4Q 2020 | 3Q 2020 | 2Q 2020 | 1Q 2020 |
| Revenue | $138,030 | $146,795 | $157,940 | $157,036 | $147,787 |
| Operating Income | $102,753 | $57,087 | $59,058 | $53,712 | $48,066 |
| Operating Cash Flow | $47,591 | $68,217 | $42,292 | $75,461 | $10,995 |
| Cash | $175,706 | $149,532 | $102,365 | $75,788 | $13,631 |
| Debt | $0 | $0 | $0 | $0 | $0 |
| Shares Outstanding (Millions) | 182.0 | 181.4 | 181.3 | 181.1 | 180.9 |
It is possible that Dundee’s leadership team may be able to successfully manage operations on three continents and that the acquired Loma Larga property in Ecuador begins to produce precious metals and copper on schedule in late 2022. If so, Dundee’s shares could be expected to perform well.
INV Metals represents a comparatively small acquisition for Dundee, so its net effect on its operating and financial results will be limited. Indeed, Dundee has generated more than US$40 million of operating cash flow for four consecutive quarters.
However, it is difficult to grasp why Dundee would want to expand its currently large geographic scope to an even broader one when the potential rewards seem limited compared with the potential headaches of operating facilities on now three continents (none of which are North America).
Dundee Precious Metals last traded at $8.52 on the TSX.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
