28-05-2025
Counter Cycle: These takeover targets are glaringly obvious (but no one's talking about 'em)
Welcome to Counter Cycle with Nero Resource Fund founder and co-portfolio manager Rusty Delroy, a Cottesloe-based fund manager who has developed a reputation for taking the path less travelled in his investments.
Today, Delroy muses on three miners who could fetch a takeover bid in the next 12 months.
Mergers and acquisitions have been the name of the game on the ASX of late, with a confluence of coalescing factors coinciding to create new combinations across the resources space.
Dealmaking partly comes from inefficiencies in the market. Aspects like access to capital, permitting and investor sentiment can undervalue companies against the fundamental cash generating potential of their key projects.
Nero's contrarian portfolio manager Rusty Delroy looks for these inefficiencies, and identifying companies that could be subject to takeovers is one of the fund's key strategies.
Big wins for Delroy's firm in recent years have come from the $385m sale of Lithium Power International to Chile's Codelco in 2023, and, in just the past fortnight, international copper juniors Xanadu Mines (ASX:XAM) and New World Resources (ASX:NWC), who have accepted respective $160m and $185m cash bids from overseas players.
Add to that MAC Copper's (ASX:MAC) revelation of a $1.6bn cash offer from South Africa's Harmony Gold, snaring the mining giant the 50,000tpa CSA copper mine in Cobar, and it's clear strategics are ascribing value to projects well beyond that attributed by Aussie investors.
M&A is often pro-cyclical (a synonym for bad) and the biggest takeover news in recent months has come in the hot, consensus pick, gold space.
But bearish sentiment around other commodities means counter-cyclical M&A is on like Donkey Kong as well. While companies in the producing space are making strong cash flows, explorers, developers and single asset producers aren't getting credit for their potential earnings.
"I think there's a robust enough forward outlook in the broader demand for commodities. At the same time, there are arguably quite distressed valuations down the curve," Delroy said.
"Up the curve, the balance sheets are strong. In gold they're not just strong, they're extreme.
"Anytime you've got a situation where up the curve has strong balance sheets and high margins, and down the curve has modest to low valuations, then that will precipitate M&A. And I think that's what we're seeing."
The aforementioned deals have, barring any interlopers, come and gone. But Delroy thinks these other stocks are primed for corporate action in the next 12-18 months.
Jupiter Mines (ASX:JMS)
Jupiter Mines has been on the radar since Exxaro paid ~A$1bn to acquire the majority 50.1% stake in the Tshipi Borwa manganese mine in South Africa through the acquisition of shares held by Ntsimbintle Holdings and OM Holdings (ASX:OMH).
At the same time it paid the equivalent of 31.7c a share to take a 19.99% stake in Jupiter, the owner of the other 49.9% of the mine, a regular dividend payer that has the cost base to survive down swings in the manganese cycle. Even with a 43% bump on the day the deal was announced, Jupiter's shares are still trading at just 19c today for a market cap of $363m.
"It's so glaringly obvious," Delroy said.
"(Exxaro have) just paid the same sort of value for the other part of the joint venture.
" In order to operate that asset with full discretion, they need to take control of Jupiter. It's a glaringly obvious fact.
"It's such an off-the-radar commodity in an off-the-radar jurisdiction at an off-the-radar company. That to me would be the absolute standout in this market."
Delroy says JMS is trading "substantially below what the clear natural owner has indicated they are willing to pay".
But even if he is "completely wrong", Delroy noted shareholders get to receive a dividend in the mean time if Exxaro takes its time.
St Barbara (ASX:SBM)
Don't be surprised if St Barbara sees some corporate interest, Delroy says.
The gold company is the ugly, unloved orphan of a deal in 2024 that saw now $5bn capped Genesis Minerals (ASX:GMD) emerge with the prized Gwalia gold mine in WA's Leonora region and $330m-capped SBM walk away with the spoils of past M&A deals gone wrong at Simberi in Papua New Guinea and Atlantic Gold in Canada's Nova Scotia.
It's looking to hive off the Canadian stuff into a separate vehicle and become purely focused on PNG, where regulatory squabbles have created noise around its proposed 200,000ozpa Simberi sulphide expansion project.
The project would deliver 2.2Moz of gold between FY26 and FY38, with FID expected in Q2 or Q3 2026, pending the outcome of a tax assessment which is under dispute between SBM and the PNG Government.
"I think St Barbara is a standout target with a 6 to 12-month view, I really do," Delroy said.
"And I know that's a hard one, because it was the ugly stepsister after the Genesis process and it was spat out with such disgust.
"But we're in a completely different landscape gold price-wise, there's a clear path there on both assets if you've got any degree of patience over a two or three year view to be meaningfully producing from them.
"That is a corporate target and/or they've announced they're looking to spin out their Canadian asset. Does that precipitate and corporate piece? Who knows, it's possible."
Delroy says Winsome, which owns the Adina lithium project in Canada's James Bay region, is a leftfield possibility.
The battery metal is trading miles into the cost curve, which means prices are way too low to incentivise new production right now.
But we've seen plenty of counter-cyclical M&A in the lithium space, notably Pilbara Minerals' (ASX:PLS) scrip takeover of Latin Resources last year and Rio Tinto's (ASX:RIO) $10bn cash splash on Allkem.
Winsome's Adina in Quebec hosts 78Mt of spodumene ore at 1.15% Li2O, with a potentially lower cost pathway to production thanks to an option over the mothballed processing plant at the nearby Renard diamond operation.
"If you're a lithium company that's got any ability to think outside the cycle you've got to be having a look at something like that and thinking maybe you tuck it away cheaply," Delroy said.
"Now I think that's a real leftfield, off-the-radar, place to do some work. Whether or not (it happens), let's see.
"Unfortunately, most mining executives are not counter-cyclical, they're pro-cyclical."
Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
