St Barbara could sell Gwalia gold mine to Genesis Minerals and call off merger

The bold plan to unify the Leonora gold district has turned into a mess, with a merger of St Barbara and Genesis Minerals now more likely to look more like an asset sale.

The bold plan to unify the Leonora gold district has turned into a mess, with a merger of St Barbara and Genesis Minerals now likely to look more like an asset sale. Fresh troubles at St Barbara’s Gwalia mine, revealed in early April, forced a renegotiation of the nil-premium merger, as both companies look nervously at St Barbara’s cash balance after the company slashed its annual guidance by as much as 30,000 ounces – and finished March with only $7m in cash attributable to its Australian assets, and $60m in total.

St Barbara drew down $20m in debt in January, after finishing December with $149.4m in interest-bearing borrowings in its current liabilities column. That debt is believed to be secured against St Barbara’s Australian assets, limiting its options absent a deal with Genesis.

And in March St Barbara failed to get a deal with Canadian authorities to extend the tailings storage facility at its mine, which means it will need to mothball its Canadian operations in early 2024, ahead of the likely approval of an expansion of the facility.

That further complicates the merger plan, in which St Barbara’s Simberi mine in Papua New Guinea and the Atlantic would be spun out into a new ASX-listed entity known as Phoenician Metals, with 80 per cent of the stock sitting with St Barbara shareholders and the remainder owned by Genesis, to be renamed Hoover House after the merger.

There are problems on the other side as well, with Raleigh Finlayson’s Genesis closing its offer for Dacian Gold in February having captured only 80 per cent of the stock, complicating plans to integrate Dacian’s processing plant into its own mining plans.

Those plans are now hostage to Kin Mining and the group of allied investors that revolve around German fund manager Wilhem Zours, which now hold a blocking stake in Dacian – presumably in the hope of being dealt in to a broader deal in the future. And then there’s the Genesis share price, which fell below 95c in March and was last seen at $1.10 – 10c below the $1.20 a share at which Genesis planned to raise $275m to consummate the St Barbara deal and give it enough working capital to bring its Leonora plans to consummation.

Both companies are running out of time to get a deal done before St Barbara’s cash squeeze becomes critical. And they only have a limited set of options.

They could press ahead largely as planned, with St Barbara launching an emergency capital raising – say $50m at 50c, a 23 per cent discount to the 64.5c at which it last traded – and recutting the ratio of shares it offers to the Genesis reverse takeover to account for the additional equity, and any change in the price at which Genesis issues its own stock. That option is believed to have been considered and rejected by both sides, however.

The most likely outcome appears to be a restructuring of the deal, with St Barbara said to be negotiating the outright sale of Gwalia to Genesis, and continuing on with Simberi and its Canadian operations.

The details are still under discussion, but the St Barbara camp is more than aware of the need to walk away with a deal it can tell shareholders represents the same value as the previous merger. That means it needs to walk away with its Canadian and PNG assets, no debt and $85m in cash, and a 38 per cent stake in Genesis to maintain its shareholders’ exposure to its own Leonora assets – or the cash equivalent.

Even if that’s achieved, it will be a tough sell to the gold bulls on the St Barbara register, particularly given the shadows hanging over both Simberi and Canada.

And it will be a tough ask for Genesis. Even with a cash and scrip deal, sources suggest Genesis could need to raise up to $400m in debt and equity to close out or refinance St Barbara’s secured lending facilities – worth somewhere around $170m – and have enough working capital to get Gwalia back under control and advance its other plans. That is a tall order for a company worth about $460m, particularly if it has to offer scrip to get St Barbara shareholders to agree to the deal.

But, with time running out, a deal needs to be done by next week, when the suspension in the shares in both companies is due to lift. But for long suffering St Barbara shareholders, certainty cannot come too soon.