Valuations making gold mergers ’less likely’
Pumped-up valuations across the booming gold space are a hefty and all but prohibitive impediment to mergers.
If the massive $16bn merger between Northern Star Resources and Saracen Mineral Holdings last week set the stage for a gold deal frenzy at this year’s Diggers & Dealers forum, the event itself has provided something of a reality check.
While there are plenty of companies that say they want to acquire more assets, and plenty of investors who are pushing them to do just that, the pumped-up valuations across the booming gold space are a hefty and all but prohibitive impediment to getting things done.
With the Aussie dollar gold price trading around all-time highs of more than $2,600 an ounce, key metrics across producers are high while any sizeable growth options are attracting major investment support.
The likes of De Grey Mining and Bellevue Gold both have market capitalisations above the $1bn mark, despite neither of them having produced an ounce of gold.
Gold producer Regis Resources has been on the hunt for additional gold assets for years, but managing director Jim Beyer told reporters on Wednesday that the current valuations in the sector meant acquisitions were unlikely.
There was a danger, he said, that the fervour in the gold space could lead to deals that no longer make sense if and when the gold price cycle inevitably turns.
“A rising tide floats all boats. What’s going to happen when the tide goes out?
“We have to make sure we haven’t done anything that puts our shareholders and the fundamental business at risk. We’ve got to be cautious.”
The Northern Star-Saracen deal, conceived by their respective bosses Bill Beament and Raleigh Finlayson, did not include a premium and could set a template for future deals in the current market.
“The deal that Bill and Raleigh did, which was based on a merger of equals and no premium, that makes sense. That to me sounds like a pretty good arrangement,” Mr Beyer said.
“But if you start to talk about things that require premiums, that’s where you say hang on, we are paying top dollar and putting a premium on top of that? Caveat emptor.”
One of the hottest gold sector stories is De Grey Mining, which has soared from 4c a share to $1.50 a share since it made its big Hemi gold discovery in the Pilbara earlier this year.
The large-scale deposit is the sort of project that every cashed-up gold producer would like to buy, but with De Grey already having a market capitalisation of just under $1.7bn it would stretch the financial capacity of all but the biggest global producers.
The question of value is however all but irrelevant, given De Grey managing director Glenn Jardine has made it clear he has no interest in selling.
He said the company had made an early decision after Hemi’s discovery that the best path to creating shareholder value lay in getting the project in to production, rather than flogging it off to any of the established producers.
“That was based on a lot of modelling we did and looking at a lot of case studies. That brings the greatest value,” Mr Jardine told reporters on the sidelines of the conference.
“It’s not ideologically driven, that decision was made well before the latest round of M&A. It’s just purely around shareholder value.”
One of the few large-scale gold assets openly on the market is IGO Ltd’s 30 per cent stake in the big Tropicana gold mine in WA.
The fact IGO only holds a minority stake in Tropicana does limit the potential attractiveness to others.
IGO managing director Peter Bradford acknowledged they complaints about gold sector valuations among would-be buyers but noted that despite those protestations there had already been plenty of interest expressed in Tropicana since IGO flagged its strategic review.
IGO, which also owns the Nova nickel mine in WA, wants to see the elevated gold valuations reflected in its share price.
“First prize for us quite frankly would be to see that reflected in the stock price and continuing to hold the asset,” Mr Bradford said.
“But the overall aim is to realise value for shareholders, and if we don’t see any market traction from that compelling story then the second phase would be to pursue a potential divestment or demerger.”
If deals do emerge in the current market, their success or failure will hinge on whether the gold price continues its stellar run. The gold bulls — and there were plenty of them in Kalgoorlie this week — point to the upcoming US election, the ongoing pandemic and the massive financial stimulus programs as a sure-fire recipe for continued strength.
But Regis’ Mr Beyer noted that history was littered with gold booms and busts.
“The cycle will turn like everything does,” he said.
“We’ve got to make sure that when things get challenging, the business doesn’t implode because we made a whole bunch of decisions that looked good when the gold price were up but which do the business a disservice when the gold price goes into the other phase of the cycle.”