De Grey shares: simplified precis of the takeover rumours

De Grey (ASX: DEG) shares are up by 23% over the past month to $1.30, having risen from just $0.05 pre-pandemic. Buoyed by its recent strong quarterly activities report, and rumours that Gold Road Resources may be considering a full buyout soon, further gains may be in the offing soon.

Elevated gold spot prices are helping to maintain De Grey’s strong showing, with the precious metal continuing to prove its usefulness as the standard portfolio real asset inflationary hedge.

And buyout or no, this ASX 200 miner remains one of the best stocks to watch in Australia for investors with a reasonable risk appetite.

De Grey share price: investment case for 2023

De Grey is a Western Australia gold explorer which has been listed on the ASX as far back as 2002. The company’s primary focus is now on its 100% owned Mallina Gold Project in the world-famous Pilbara region, where it discovered large scale, near surface gold deposits within an area called Hemi.

This gold is expected to be mined using low-cost open pit methods, a strategy to be fully confirmed by an ongoing drilling program. Further, the project is located just one hour from Port Hedland and Karratha and is surrounded by critical infrastructure including two sealed highways, two gas pipelines, and a high voltage powerline.

In De Grey’s recent quarterly activities report, the miner highlighted Mallina’s prefeasibility study, which shows that the resource could see average total annual production of 540,000oz of gold during the initial ten years, for a total of 6.4 million oz of minable resource over 13.6 years of expected mine life.

The initial capital cost for both the projected plant and infrastructure is set to cost a considerable $985 million, with a further $68 million required to account for pre-production costs. For context, the ASIC is expected to cost $1,220/oz over the first five years, and then rise slightly thereafter.

But the miner expects a payback time of just 1.8 years post-tax, with a net present value of $2.7 billion post-tax. DeGrey is almost completely concentrated on Mallina, having scaled backed further exploration to just two Diamond drill rigs since June this year.

Gold Road Resources speculation

Gold Road initially gained a 14.45% stake in De Grey through its relatively recent all-scrip $250 million acquisition of DGO Gold. Its 100% owned subsidiary, Renaissance Resources, has also acquired an additional stake through an equity collar agreement with Credit Suisse, comprising of circa 66 million shares for $66 million. Overall, this has taken Gold Road’s stake in De Grey to 19.99%.

Gold Road has made clear that ‘this shareholding is seen as a long-term investment and Gold Road does not intend to make a takeover bid or other offer for DEG, but Gold Road reserves its right to do so and to make further investments in DEG at any time.’

It’s worth noting that the company had previously sought Apollo Consolidated before being outbid by Ramelius Resources in 2021.

A further factor spurring takeover rumours is Gold Road’s apparent reluctance to nominate a director to De Grey’s board. In an interview with The Australian, Gold Road CEO Duncan Gibbs acknowledged that ‘it’s not abnormal for a company…that has a 20% position to have a board nominee…pros and cons to doing that and, at the moment, it’s not something that we’ve approached De Grey about.’

With the definitive feasibility study and the final investment decision due in mid-2023, there’s still plenty of time for both parties to consider the benefits and drawbacks of an offer. The hefty $985 million initial capex bill may be a strong incentive; De Grey may find financing the mine harder than it expects in the current economic environment.

Of course, Gold Road will want to woo DeGrey with a scrip-only bid, to keep its own cash reserves to help fund the Mallina capex and potentially for further exploration. It’s also worth noting that both companies are trading with similar market caps of circa $2 billion. In fact, Gold Road’s is smaller and this could become an obstacle for investors.

Further, with its Tier 1 asset, De Grey may not wish for a merger of equals which would be far easier to push through. However, Gold Road is already producing, and this cash flow could be key to convincing backers to help finance Mallina’s development.

A tie-up may be in the works, but time on the clock remains plentiful for now.

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