A company I recommended in the past, IDM Mining (IDM.V), just got a friendly takeover bid from Ascot Resources (AOT.V). The deal is instructive, so I’m going to weigh in.

Please note that I do not own shares in either company.

Quick Case Study: IDM Mining Takeover

Summary

You may recall from my In The Pit grilling of IDM CEO Rob McLeod, that I think IDM’s Red Mountain project is a winner—but I was concerned about the company’s ability to advance the project. This deal solves that problem, taking shareholders in both companies much closer to high-margin production.

Key Details

IDM’s Red Mountain has substantial underground infrastructure in place, a major permit in hand, and a robust feasibility study yielding a 5% discounted net present value (NPV) of C$155 million and a 40% after-tax internal rate of return (IRR).

Unfortunately, the company already has over half a billion shares issued, and had become a penny stock. That was going to make it difficult to finance building the mine on reasonable terms.

Ascot has a team of proven mine-builders working on the historic Premier gold mine, which has a plant and tailings facilities, and several properties in the immediate area. These are about 25 kilometers from Red Mountain. Ascot has combined 43-101-compliant resources that total over 2.0 million ounces of gold, averaging more than 7.0 g/t gold. Recent exploration has delivered some very high-grade results, including 8.9 meters of 9.85g/t gold and 104.8g/t silver, and 12.4 meters of 8.91g/t gold and 22.9g/t silver. The thickness of some of these zones is a critical advantage.

All good, but Ascot’s assets are not as advanced as IDM, which is closer to a construction decision as is. Ascot has a much stronger balance sheet, however, and a more reasonable share structure. Both companies had stated goals of getting to profitable production as fast as possible, even before the deal was announced.

I asked management how they were likely to do that, and they said all options are on the table. The combined company could advance Red Mountain quickly into the pre-production sweet spot (PPSS), and then use the cash flow to advance its other projects. Or it could refurbish the Premier plant and truck ore from Red Mountain to a central processing facility for all the mines in the combined package. Or the company could even build both Premier and Red Mountain separately, as soon as either was permitted, not waiting for one to pay for the other.

However they do it, a single team working out of Stewart should create greater operating efficiencies.

The Deal

This takeover is a more of a lopsided merger. The technical teams are being combined and Ascot’s board expanded. This is good for project development and community relations.

The critical point, however, is that the offer is for shares, not cash.

This means that IDM shareholders retain all the upside Red Mountain has to offer via their new AOT shares. If the offer were for cash, all but the most recent IDM shareholders would be left with a lot less cash than they started with, and no exposure to the upside.

Looks like a win-win to me.

My take

I would:        Hold IDM
                        Watch for AOT to enter PPSS

I wondered how Rob McLeod and the IDM team were going to get what looks like a very rich mine into production. Now we know.

Congrats to both teams for seeing and seizing this opportunity.

Monday, January 7, 5:21pm, EDT, 2019