GMS: Candace MacGibbon on INV Metals sale to Dundee; M&A and carbon credits

In July, Dundee Precious Metals (TSX: DPM), which held a 23.5% stake in Ecuador-focused INV Metals, acquired the remaining shares in the junior exploration company that it did not already own in an all share deal.

Dundee acquired the shares for about 80¢ — a 63% premium to INV Metals’ closing price on the Toronto Stock Exchange on May 28. Iamgold (TSX: IMG; NYSE: IAG), INV’s largest shareholder at the time with just shy of a 36% stake, supported the transaction, which had an equity value on a 100% basis of about US$132 million or US$104 million for the portion of the company DPM didn’t own.

INV Metals owned the Loma Large project, about 30 km southwest of Cuenca, and completed a feasibility in May 2020 that outlined average production of 203,000 gold-equivalent oz. a year over a mine life of 12 years at all-in sustaining costs of US$627 per ounce. The mine would produce two concentrates, a gold-copper concentrate and a gold-pyrite concentrate.

In a fireside chat with Canadian Mining Journal Editor Alisha Hiyate at the Northern Miner’s Global Mining Symposium this week, Candace MacGibbon, INV’s former CEO, talked about the deal and noted that the intention “was never for us to sell the asset … we were not moving it forward just to tick the boxes in order for sale. We were moving forward with building this.” Having said that, she said, there are always two options: “Either you build it or you sell it,” and in this case at this time, the company’s shareholders “overwhelmingly approved it so that was the course of action that we took.”

Fortunately for INV Metals and for its shareholders, Dundee was the right fit to take Loma Larga further, she said. Dundee’s underground Chelopech copper-gold mine in Bulgaria has similar geology, mining methods and processing flow sheet as contemplated at Loma Larga, she explained, and Dundee also sells concentrate and has a dual stage flotation circuit at Chelopech.

In addition, Dundee owns the Tsumeb smelter in Namibia, which can process some of the concentrate, and the company had also successfully built the Ada Tepe open-pit mine in Bulgaria. Not only that, but it had experience building and operating mines in biologically diverse areas like Ecuador, and where anti-mining sentiment could be significant. Finally, it made sense because Dundee is “fully financed to build it.”

“For all those reasons it was a good fit and so I’m pleased,” she said, “because this was my life for ten years, and my passion for ten years, [and it is] now going to be developed [and] that was very important to the board and the management team.”

While INV had assembled a board and technical team of builders and operators to build the mine itself and was in the midst of financing and permitting it, one of the factors it had to consider as a single-asset company was the length of time it takes to permit and finance a mine, and that “has to be weighed against the dilution to the shareholders as you move forward.”

“We were presented with an offer from our very supportive shareholder who we knew had the resources, the technical competency, and showed it to the shareholders as you do with your governance, and the shareholders overwhelmingly approved it, including Iamgold, who also understands that the asset now is in good hands and has the technical expertise in-house to move forward.”

INV Metals acquired Loma Larga in 2012 from Iamgold in exchange for shares. “They remained a significant shareholder because they believed in it,” MacGibbon said. “It just became noncore because it was in Ecuador and Ecuador was going through some trouble as far as what was the sentiment of the day.”

While INV Metals had to deal with vacillating sentiment about mining in Ecuador under different government regimes and repeated referendums, which she described as “very politically motivated for personal gain,” she also noted that with Lundin’s Fruta del Norte mine and the Chinese-owned Mirador mine coming on stream, it helped people realize that there are benefits to mining: “there are significant employment opportunities and production opportunities and supply chain opportunities, which is fantastic.”

“In order to have a federal government that is supportive of mining, you have to show them that they’re going to get the tax revenues … And so when they get that first check in the mail … and it’s significant, that then allows people who may not have been as supportive to say: ‘Oh, this is a significant driver, assuming we do it right, of future GDP growth and a revenue tax base. I think that’s been very helpful.”

Nevertheless, the mining industry needs to continue to spend time and money to get people who don’t understand mining to understand it, she said, and “really focus on the benefits and the impact, because it’s not all good. And then work together with the communities to overcome those such that you still have that relationship that’s built with trust. And as I was saying, our budgets are so lean. So it’s nice when you have an operating partner who understands that that communication is a key budget line.”

Switching to the topic of mergers and acquisitions, MacGibbon said she was excited to hear the news of the Kirkland Lake Gold and the Agnico Eagle Mines transaction. “I’m thrilled we’re going to have a Canadian powerhouse,” she said. “I think we need that. Our reputations abroad are well deserved and to be able to keep that and build that is awesome.”

More broadly, MacGibbon noted that anecdotally, “the mining investment bankers are very busy; so that means that people are talking to each other and they’re looking at either mergers as equals, which probably implies closer to no premium deals,” and asset purchases.

“It’s easier to sell a merger of equals when there’s no premium … and so that may be the trend certainly at the big caps,” she said, while with asset purchases, “we’ve got a lot more room for premiums.”

Development assets are historically undervalued at this point compared to comparables over the years, she added, noting that it will only become more expensive to build mines with cost inflation and labor shortages.

“There may be a little bit more of a devaluation, but then the premium on the stock price becomes really important for shareholders and for management teams to be able to support the acquisition,” she said. “And so the premium for shares might be high, however, the Price to NAV ratio could be on the low side of the comparables. I think that that will likely and could likely be a trend in the future, which is fine for shareholders of course.”

Looking ahead, ESG will also become a significant factor in all deals, she said, “because without ESG, you won’t even be a candidate for M&A activity. Nor will you be a candidate for bank financing or equity financing. … And so it’s time to step up.”

How early you have to do that in the cycle is also important. As a result, it’s going to get “way more expensive to be an exploration company and investors are going to have to realize that.”

“So if you’re looking for a new gig … the compliance for ESG and reports is a good one, because we’re going to have to be able to audit what companies say.”

MacGibbon, who sits on the board of Osisko Gold Royalties, also said that royalty companies “don’t have the exposure to the cost increases that we as producers do.” And “in the near term, with gold prices being strong and metal prices being strong, they are going to rise to the top of the investment thesis.”

Importantly, she noted, that once government policymakers realize just how important metals are in the transition to a greener economy, “we’re going to have developers in the sun.”

“There’s no doubt that prices are going to go up, because there is going to be a supply crunch, that’s for sure, on the metals,” she added. “The question will be what happens to the inputs? And can we manage that? And then on the developers, let’s hope there’s a big push in the next couple of years because we understand that the carbon neutral economy transition will need them.”

MacGibbon also took a few moments to discuss her latest involvement as a director with Carbon Streaming Corp. The thesis is that the world is going to require that companies be carbon neutral and therefore they will have to buy carbon credits, she explained.

“And so we will, as a company, invest into projects that create carbon credits. We will be contractually bound to be able to receive those carbon credits, whether it be a percentage or a certain fixed number of carbon credits over a period of time. And then the thesis is they will appreciate in value and then we will resell those in the market to get that price appreciation.”

Retail investors will then have access to a product that is providing a real impact on the world in a positive way, in an environmental and social manner, she said.

“I think that it’s going to be the space that is going to blow up. The voluntary market right now is about half a billion dollars. I think in a couple of years it’ll be tens of billions of dollars and so it’s definitely a space to watch.”

Watch the full interview here: