Analysts weigh in on $903m Tropicana acquisition by Regis

As a result of the Tropicana acquisition, Regis would be producing at least 600,000 ounces per annum of gold from the 2024 financial year. (Photo by DAVID GRAY / AFP)

Regis Resources confirmed to the market on Thursday that it had received strong demand for its equity raising to buy a 30 per cent stake in the Tropicana gold mine for $903 million.

But analysts at JPMorgan see both pros and cons about the purchase and have downgraded their rating on the stock to a hold.

An equity raising to secure $650m at $2.70 per share through Bank of America was carried out to fund the transaction, with the company also securing $300m worth of debt.

But a risk still exists that Tropicana’s other owner, AngloGold Ashanti, takes up its 60-day right to match the Regis offer and itself buy the 30 per cent.

Regis told the market on Thursday that it had successfully completed a placement to raise $200m and an entitlement offer for institutional investors.

Collectively, that has resulted in Regis netting $494m and the retail component of the entitlement offer will raise about $156m and closes on May 5.

JPMorgan analysts said that the deal to buy the Tropicana interest appeared dilutive to Regis Resources on most valuation metrics.

Yet on a positive, they said that the asset should improve Regis’s asset quality and increase mine life.

It also offered some diversification at a time it is constructing its McPhillamys gold project in NSW, reducing some of the company’s earnings risks.

As a result of the Tropicana acquisition, Regis would be producing at least 600,000 ounces per annum of gold from the 2024 financial year.

They add that the price paid for the asset by Regis was 12 per cent higher than what JPMorgan pegged the asset at when the sector was trading at a 20 per cent discount and a 32 per cent discount to its Regis target price.

“Including stamp duty and fees, the acquisition will cost about $980m,” said JPMorgan in a research note.

“They look to be expensive ounces, but the optionality offered through more underground and regional exploration upside is likely more exciting than anything else in Regis’s current portfolio, even if only a 30 per cent share.

“Size, quality, life and diversification are also important drivers.”

The analysts say that Regis is comfortably funding the acquisition, but the raise, a discount of almost 15 per cent to its last trading price, will dilute its earnings per share.

“The last time Regis stock could be purchased at $2.70 a share it was recovering from a flooded pit, grade and inventory issues, and the Australian gold price was $670 an ounce lower.”