St Barbara and Genesis to merge to consolidate Leonora gold district

It has taken most of a year, but St Barbara and Genesis have agreed to the terms for a deal. But which group of shareholders comes out ahead?

Raleigh Finlayson’s Genesis ­Minerals has finally got a deal done for St Barbara, with the companies agreeing to a $1bn “no premium” deal to consolidate their respective ground in the ­Leonora gold district.

While St Barbara will be the vehicle that conducts the consolidation, the deal is effectively a ­reverse takeover, with Mr Finlayson and his team emerging with management responsibility for the merged company, Hoover House – named for former US president Herbert Hoover, who ran the Gwalia gold mine in the late-1890s as a mining engineer.

St Barbara will shed its non-Australian assets – the Simberi gold mine in Papua New Guinea, and the Atlantic gold operations in Canada – into a new vehicle, which intends list on the ASX.

St Barbara will issue 2.0338 of its own shares for each Genesis share on issue, with Genesis to raise an additional $275m to inject working capital into the merged entity. The deal delivers St Barbara’s operating Gwalia mine into Genesis hands, the only operating asset the group will hold if the deal completes.

Genesis is yet to complete the takeover of Dacian Gold, and will not put a reserve on its Ulysses deposit until the middle of 2023, meaning St Barbara is contributing the overwhelming majority of the combined mining entity’s 3.2 million ounce reserves.

St Barbara shareholders will emerge with 38 per cent of the combined group, Genesis shareholders with 41 per cent and the remaining 22 per cent held by participants in the $275m raising.

Genesis had a $490m market capitalisation ahead of the deal. St Barbara was worth $530.8m.

But while the raw numbers suggest St Barbara shareholders have given up the lion’s share of the value while contributing the bulk of the assets, the merger disclosures also show the ASX-listed gold miner is rapidly running out of cash and may finish the year in breach of its debt covenants.

St Barbara held $47m in cash and equivalents at the end of ­November, the merger documents show. That is down from $65m at the end of September.

At the end of June, St Barbara held $99m in cash, suggesting the company has burned through cash at the rate of about $10.4m a month over the past few months.

“Separate to the transaction, St Barbara is currently seeking to negotiate with its existing lenders a covenant waiver with respect to one of its existing covenants (interest cover ratio), which is expected to be in breach when measured as at 31 December 2022,” the company said on ­Monday. “Through preliminary discussions, St Barbara expects lender support for the transaction and covenant waiver.”

Presenting the details of the merger to shareholders on ­Monday, St Barbara chief development office Andrew Stelein defended the relative valuations, saying the spin-out of the company’s Simberi and Atlantic operations – to be called Phoenician Metals – will come with no debt, the shares St Barbara holds in Kin Mining, Catalyst Metals and Peel Mining, and about $85m in cash.

That would add significant ­additional value to existing shareholders, he said.

“We are pulling out the St ­Barbara overseas assets and a ­significant amount of cash and equity investments – which often get overlooked – into Phoenician Metals,” he said. “That’s how we’ve structured essentially what we think that the St Barbara’s shareholders should be rewarded with as the upside.”

Mr Stelein will become Phoenician Metals managing director if the transaction goes ahead.

Mr Finlayson said Genesis’ $275m capital raising would be used to pay down St Barbara’s debt when the deal closed, creating a “clean, well funded vehicle”. “This is a genuine win, win win for St Barbara, Genesis and Dacian shareholders. The benefit to all three sets of shareholders ­includes operational flexibility and reduced risk, the matching of the right ores to right mills, having the ability to target a quality over quantity mining strategy at the high grade Gwalia asset, and a complete reset of corporate costs and associated cost savings.”

Existing shareholders may still have to wait some time for the benefits of consolidation of ­Leonora’s rich gold ground to flow through, however.

Mr Finlayson said the combined company would initially target a 300,000 ounce a year production profile. But ore from Genesis Ulysses deposit won’t be fed into the Gwalia mill until the 2024 financial year, he said, with full ramp-up not likely to be completed until 2026.

The combined company will not outline a full plan for the development of its Leonora assets until September 2023.

But the deal does call time on St Barbara’s latest disastrous foray offshore. The company was nearly brought undone by its previous venture outside of Australia’s borders, through the $556m acquisition of Allied Gold in 2012, which brought Simberi under its control.

That time the company was rescued from its debts by a strong performance from Gwalia and the rising gold price.

Its 2019 takeover play for Atlantic Gold has not gone much better. The company paid $780m for the Canadian-listed company, and took a $223.5m impairment to the assets last financial year, on top of the $349.3m impairment booked the previous year.

It is understood Atlantic has a current carrying value of about $460m, but St Barbara flagged a further impairment of the assets in its upcoming half-year results

Both companies are expected to return to trading on Tuesday.