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Takeovers, Gold, and Outperforming the ASX

by The Wrinkle | October 22, 2010

As indicated last week we're going to talk about potential takeover targets on the ASX this week and in particular a comment on the odd gold stock or two. I'd like to start with some general comments in relation to takeovers, and rather than re-invent the wheel I thought it would be useful to share some recent commentary from Tom Elliott, the managing director of MM&E Capital

"Over the years I've created six simple criteria that can help you pinpoint whether a stock is likely to experience some kind of corporate activity.

  • The presence of a strategic shareholding on its register.
  • Industry consolidation taking place. (Read Gold, The Wrinkle)
  • Substantial changes to the legislative or regulatory environment.
  • The occurrence of a previous (and unsuccessful) bid for the company in question.
  • Monopolistic and/or duopolistic industry structures.
  • Under utilised balance sheets and strong cash flows. (Again read gold)

The first thing to note is that our definition of "corporate activity" does not necessarily mean a full takeover. We interpret it to include strategic shareholdings, blocking stakes and demergers – all of which contribute to outperformance over the index."

According to Tom the chances of the average stock receiving a takeover bid is less than 10%, and 4 out of the 11 stocks Tom picked last year had some corporate activity.

Tom's takeover picks (as a group) from 14 July last year have outperformed the ASX by 7.2% based on an equal weighting ie 1/11. Last years list included FGL, CMJ, AWB, ESG, ORG, STO, AIO, AXA, SEK, RIO, and CTX.

Tom's list for this year as at 20 October includes CCL, CEU, CRZ, CSR, IAG, JBH, MAH, SUN, TAH, TEN. Good luck and happy research.

There are no gold stocks included in Tom's picks so it looks like the Wrinkle will be heading out on a limb once again. Here are some gold stocks that could be worth investigating and watching for takeover or structural activity over the coming year.

Firstly I'll start with the ones I currently hold, put your money where your mouth is, as they say.

BCN – Beacon Minerals – Astute management, brokered an excellent side deal in tin that recently returned a multi million paper profit on their shareholding, good extensive area under license, completing final testing of this area now.

TRY- Troy Resources - I've watched and held this stock since it was below $1, it's now over $3. Excellent CEO ex BHP, primarily South American holdings, but in stable regimes. Solid producer from proven reserves, simple expansion buy for South American foothold.

CRC – Cortona Resources - Not currently held by me, but has been. I'm looking to get back in again. Good reserves around the greater Canberra area, classic proven area. Better technology these days to pick up the less easier pickings missed earlier. No rush on this one (famous last words) as more attractive when closer to material production levels.

SLR – Silver Lake Resources - colleagues pick, good extensive reserves in Australia, steady share price growth, reasonable choice.

ROL – Robust Resources – Not for the faint hearted this stock jumps around a lot and has various related and cross shareholdings in the resource sector plus good gold reserves in PNG. The extent and diversity of its structure and the PR conscious nature of its management make it a possible target for at least part of its business.

SGZ – Scotgold Resources – To finish on a light note, don't laugh, but this is a company looking to establish a working gold mine in Scotland. Obviously a few environmental hurdles to jump before they get underway, however they do have good proven reserves. Potentially as the only operating gold mine in the UK the Wrinkle is aware of; I think it could have attractive novelty value to the right kind of investor. Stranger things have happened

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