Is Aussie M&A set to rise?

The Super Pit.

Northern Star Resources and Saracen Mineral Holdings’ announcement of a $16 billion merger has brought anticipation for the rise of a new top 10 global gold producer, with signs there may be more mergers and acquisitions (M&A) in the gold sector.

In early 2020, Kalgoorlie Consolidated Gold Mines (KCGM) in the Goldfields region of Western Australia became part of a joint venture between Northern Star Resources and Saracen Mineral Holdings.

This was the first time in KCGM’s 30-year history that it was brought under 100 per cent Australian ownership.

By October, the two owners had taken their relationship a step further, announcing a merger-of-equals to combine both companies and their operations in Australia and the United States.

If the first milestone at KCGM wasn’t enough, the merger will see the famous Golden Mile in the region consolidated under a single owner, with the deal valued at $16 billion.

The mining companies delivered a joint presentation at this year’s Diggers and Dealers Mining Forum in Kalgoorlie in the week after the announcement, going into further detail about what the deal would provide through their portfolio of Tier 1 mining assets.

According to Northern Star executive chairman Bill Beament, the two companies will deliver a mix of risk and opportunity culture for what he expects to be a successful outcome.

“The way the Saracen team addressed the opportunity was looking at all the risks here as Northern Star looked at all the opportunities,” Beament, presenting at the 2020 Diggers and Dealers Mining Forum, explains.

“So, blending that risk and opportunity culture in I think is going to create an absolute mega opportunity for every stakeholder associated with this business.

“We will be the sixth largest gold producer by market cap and we’re eighth on a production basis, and growing further as we hit our two million ounces in the coming years.”

Future proofing is set to be a key outcome of the merger-of-equals, with Saracen managing director Raleigh Finlayson highlighting the importance of increasing growth.

“One of the other key ingredients of our merger is Saracen has invested in the future and an increase in grade over the next five years,” Finlayson explains.

“The only companies I can think of – number one and number two – (are) Northern Star and Saracen for that future growth profile, which is obviously more of a compelling reason why we’re bringing the two companies together.

“Saracen has gone along in future proofing so investing money now with a strong prevailing gold price (will) underpin and secure us through the future regardless of what the gold price is. There’s lots of work to do over the course of the next 12 months to fully optimise that, but we have significant opportunities and frankly very few of those are fully reflective of the $1.5-2 billion of MPV (market potential value) synergies that we’ve articulated to the market.”

Outside of KCGM, other growth opportunities are on offer due to all of Northern Star and Saracen’s assets being located in Tier 1 jurisdictions.

“We see (Pogo in Alaska) as an absolute beachhead for growth into the future after we ramp up to 300,000 ounces,” Beament adds.

For KCGM, meanwhile, the merger has been dubbed as its true consolidation.

“(The) 1989 KCGM was formed as a consolidation of the Golden Mile. This is actually the true consolidation of the Golden Mile of Kalgoorlie and hence the name ‘Kalgoorlie Consolidated Gold Mines’ will live on and will be referred to that entire operation,” Finlayson says.

The merged board between the two companies will include five Northern Star directors and four Saracen directors. Beament will chair the combined entity, while Finlayson will become managing director for the first 12 to 18 months.

Mergers under the microscope

Herbert Smith Freehills partner and head of global mining team Jay Leary says the gold sector has weathered the COVID-19 storm through mergers and acquisitions (M&As), including the Northern Star and Saracen deal.

“While overall M&A activity has been subdued in light of the COVID-19 pandemic (both in Australia and abroad), the resources sector – in particular the gold sector – has continued to generate M&A activity throughout, including public M&A deals such as the Northern Star/Saracen merger,” Leary tells Australian Mining.

“As markets have begun to adapt to aspects of the pandemic, public M&A activity is starting to ramp up again, with 21 Australian deals announced in the three months from June to September (compared with 51 for the total FY20 year).”

Leary says that the Saracen and Northern Star deal exhibits advantages associated with project ownership.

“The Northern Star/Saracen merger is underpinned by its own unique logic — i.e. bringing the KCGM Super Pit operations into one common ownership structure,” he says.

“The deal does bring a renewed focus to the benefits of rationalisation of project ownership and operation within producing regions.”

According to Leary, there are also benefits for both companies with the merger receiving equal benefits.

“The genuine merger of equals/zero premium nature of the proposed transaction also reinforces the capacity for companies to proceed with transactions without a winner/loser scenario,” he explains.

Other commodities outside of the gold-focussed Northern Star and Saracen merger are also expected to have large M&As in the coming years.

“To create a new de-carbonised world, there will be a need to increase the production of minerals such as copper and lithium (among other minerals),” Leary says.

“The question is not so much a matter of if, but when. We suspect that that demand is likely to ramp up in the medium term, rather than the near term.”

Compelling competition

While the Saracen and Northern Star merger plans to catapult them up the list of the top 10 gold producers, they have not been the only major players dipping their feet into new M&As.

According to Wood Mackenzie head of gold research Rory Townsend, the central theme for these major mergers is to improve shareholder value, which is commonplace in the resources industry.

“There are quite a few examples of such high-profile mergers, like Barrick and Randgold, Newmont and Goldcorp and Barrick and Newmont’s JV for their Nevada assets,” he says.

“The central theme for a considerable number of these mergers, including Saracen and Northern Star, is to unlock shareholder value through expected synergies.

“Other than securing the Tier 1 assets, some of the driving force in this bigger-is-better mentality seems to be the desire to entice some of the more generalist investors to the space and the belief that scale and reduced operational risk will help to do that.”

Locally, Townsend believes Western Australia is the place where the industry is likely to see more M&A activity.

“If I had to choose one, I think WA seems like a natural choice given the sheer number of miners, combined with the concentration of operating mines, projects and truly exciting prospects emerging there,” he says.

M&A activity is more likely to occur at the junior to smaller mid-tier side of the market, compared with companies such as Newcrest Mining and Evolution Mining, he continues.

“Evolution Mining, of course, completed the acquisition of the Red Lake mine this year and are in the process of evaluating their options at Mt Rawden,” Townsend says.

“The takeaway from (Evolution chairman Jake) Klein’s speech at Diggers is that they will not be buying assets for the sake of buying assets, with a strong emphasis on quality.

“At the more junior, to smaller mid-tier end of the market then it is likely that we see more action here, particularly where miners are operating in each other’s backyards, it just feels like a bit of a no brainer if they can agree on nil-premium deals.

“I’m also sure those miners who are struggling to replenish reserves through exploration will undoubtedly be scouring the landscape for opportunities.”

Townsend says a “buy versus build mentality” is prevalent within the industry, which has added attention on M&A opportunities.

“It would certainly seem that the buy versus build mentality is still there, even if high prices have created a bit of a buzz again around exploration, particularly when it comes to greenfield projects. Part of that is due to the lack of exploration success we’ve seen over the past decade or so, which is why we’re seeing this re-shuffling of the deck chairs,” he concludes.

This feature will also appear in the December edition of Australian Mining.

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