The Evolution of Conquest
Rarely do you buy a small cap which is almost certain to enter the big end of town within 35 days, but in Australia gold producer Conquest Mining, you have just that.

Conquest (ASX code CQT) has two mines in northern Queensland, producing about 70,000 ounces of gold a year.

In a short time, this company will become part of a much bigger mining company – Evolution Mining - which will also contain Catalpa Resources (CAH), which has a mine in WA, and two mines in southern Queensland vended into the venture from Newcrest Mining (NCM).

The end result is that after a $150 million rights issue in mid-November, Conquest, Catalpa and Newcrest will each own about a third of Evolution Mining, which is forecast to produce 370,000 ounces of gold next year, placing it in the top five producers in the Australian market.

With the volatility in the gold price (last week it had fallen about 20 per cent in three weeks after reaching a record high in early September) , Conquest's shares are down to 45c, having traded as high as 63 cents in mid-September.

This gives Conquest a market cap of $270 million and implies that Evolution Mining has a market cap of $800 million plus some change.

This is very cheap if you compare Evolution with Alacer Gold (ASX code AQG) which produces about 400,000 ounces of gold a year and whose is market cap is $2.8 billion. If you gave Evolution a market cap of between $1.2 billion to $1.5 billion, this implies a share price of at least 65 cents for Conquest.

The motivation for Newcrest is that its two assets, previously insignificant in its portfolio, will have valuations in the region of $400 million. It will also have two members on the board on a board of eight.

A risk is that the company could be a dumping ground for Newcrest assets, but Evolution does have heavy-weight institutional backing in the form of Baker Steel and Blackrock that have undertaken to buy $25 million each of the rights issue. There is also the presence of industry veterans Jake Klein as chairman who is from Sino Gold and non-executive director James Askew of OceanaGold.

When you are a punter, you need to know that there are some heavyweights whose interests are at least somewhat aligned towards your own.

Merger and acquisition activity

Speaking of the big end of town, there has been a lot of media about the $12.3 billion takeover by South African/UK brewer SABMiller of Australia's Foster's Group.

This column can report that there has been quite a bit of M&A activity at the small end of town (as well as some rumoured activity to come…).

Our Radar was alerted yesterday when printer provider CSG (ASX code CSV) released an announcement that it had received a “non-binding, indicative and confidential proposal” or takeover offer of $1.20 a share in cash – its shares were trading at 72 cents prior to the bid and have jumped to just over $1 in its wake.

Other deals, big and small, noticed by this column include Count Financial being taken out by Commonwealth Bank; ConnectEast toll road operator is being acquired by an infrastructure fund; Macarthur Coal is under takeover offer by Peabody Energy, and steelmaker, ArcelorMittal; tugboat operator Miclyn Express Offshore (MIO) was raided by a private equity fund which bought close to 26 per cent; and Sundance Resources is supposedly being acquired for $1.2 billion by Chinese interests. Oh, and Rio Tinto and Mitsubishi are attempting to buy out minority interests in Coal & Allied Industries.

Historically there have been periods of more frenetic takeover activity, but if you compare it with the stretch of time during the financial crisis when virtually nothing happened, it's a veritable investment banker's paradise. This is the case because there is a lot less debt being serviced by the corporate predators; and the taps aren't being turned off by the banks (as they were during the dark days of 2007 and 2008).

Another factor (to ram the small cap angle home) is that there are more likely to be deals at the smaller end, because of obvious reasons – you need less money to buy a small company; there are thousands more of them; and on the whole, they are cheaper in terms of the multiples you'd need to pay.

Takeover rumours doing the rounds right now surround office services provider Spotless Group (SPT) and interest from some former (senior) employees; and there is the perennial talk that Austin (ANG) could be taken over by 19.3 per cent stakeholder Bradken Resources, a division of Bradken.


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