Silver Lake Resources, Red 5 in $2.2bn merger
WA gold miners Silver Lake Resources and Red 5 have agreed to a $2.2bn merger as a wider consolidation of mid-tier producers heats up.
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West Australian gold miners Silver Lake Resources and Red 5 have agreed to a $2.2bn merger as a wider consolidation of mid-tier producers heats up.
The merger, which is subject to several conditions including court and shareholder approvals, would create the ASX’s fifth largest gold producer, with annual production of around 445,000 ounces.
As part of the deal, announced to the market on Monday, Red 5 will acquire 100 per cent of Silver Lake shares, with Silver Lake shareholders to receive 3.434 Red 5 shares for every share held, representing an 11 per cent premium on the previous closing price.
Red 5 shareholders will own 51.7 per cent of the new entity and Silver Lake - which owns a 11.9 per cent stake in Red 5 - the remainder. The new entity is expected to have a market capitalisation of more than $2.2bn.
A formal tie-up between the two junior miners had been widely expected since Silver Lake secured an 11 per cent stake in Red 5 last September.
The combined entity’s board will be led by Red 5 chairman Russell Clark, while Silver Lake boss Luke Tonkin will take the reins as managing director and chief executive.
The new will comprise four directors from each of two companies’ current boards.
In a joint statement, the companies said the deal “de-risks shareholder returns through asset diversification”, and creates a combined entity with a “sector leading net cash and listed investments position of $378m”.
“This transaction represents a highly complementary combination of assets and balance sheets for the mutual benefit of both Silver Lake and Red 5 shareholders,” Mr Tonkin said.
“Mergers work when each company brings attributes that the other company does not possess, which is undoubtedly the case here.
“The increased scale, diversification and financial strength of the new company that will be formed via this transaction will be primed for continued strong cash flow generation and further growth.”
The deal, which has the backing of both boards subject to no superior proposal emerging, is subject to court approval and an independent expert’s report.
Shareholders are expected to vote on the proposal in May, with the deal earmarked for closure by June.
Raleigh Finlayson’s Genesis Minerals, which has been buying up mining and exploration assets around Western Australia’s Leonora region, had previously been identified as a potential suitor for Red 5’s King of the Hills gold mine, which is located about 35km north of the Gwalia gold mine that Genesis acquired last July.
Silver Lake owns the Mount Monger goldfield south-east of Kalgoorlie, the Deflector gold mine 160km east of Geraldton, and the Sugar Zone underground mine in northern Ontario, Canada.
The combined entity will control an ore reserve of 4 million ounces, and a mineral resource inventory of 12.4 million ounces.
In a note to clients, Moelis Australia analyst Paul Hissey said the proposed merger would address some of the “deficiencies of both businesses in a logical way”.
“(The) addition of a long-life operation instantly addresses some of the concerns around the longevity of SLR’s (Silver Lake) business. We model King of the Hills out to well beyond 2032,” he said.
“The strength of SLR’s balance sheet should enable a resolution to the debt position which we believe had hindered RED’s cash generation ability, while the hedging will be diluted across a larger production base.”
He said the deal had been agreed “for what appears to be a very modest premium”.
Red 5’s is being advised by financial adviser Gresham and legal advisers Herbert Smith Freehills and Davies Ward Phillips & Vineberg out of Canada.
Silver Lake is being advised by RBC Capital Markets, EurozHartleys and legal adviser Corrs Chambers Westgarth.
Silver Lake shares were trading 13 per cent lower on Monday, at $1.10, while Red 5 shares were steady at 33c.
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Originally published as Silver Lake Resources, Red 5 in $2.2bn merger
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