As 2019 draws to a close, the long-anticipated consolidation in the gold sector is picking up speed with news of yet another merger. On Monday, Equinox Gold Corp. proposed a no-premium, all-stock combination with Leagold Mining Corp. valued at around $770 million.
The tie-up would unite two Vancouver-based intermediate miners that are both backed by industry heavyweights and both focused on the Americas, with six mines spread across Brazil, Mexico and the U.S.
Ross Beaty, chairman and the largest shareholder of Equinox, pitched the deal as a means to achieve scale. He argued the new company, which will keep the Equinox name and have a market capitalization of roughly $1.75 billion, would have better liquidity and better risk diversification. He predicted it would trade at a higher multiple as a result of its larger size, and told investors the combination would enable it to hit one million ounces of gold production by late 2021 — two years ahead of schedule.
“There’s no magic to one million ounces, it’s just a number,” Beaty told analysts during a call Monday. “But it represents scale … and scale really does matter.”
In an interview with the Financial Post, he said the market for gold mining companies has evolved in the last decade after disappointing returns repelled many generalist funds. Now, bigger companies automatically garner proportionately larger investments from exchange traded funds, and size really does open up a new class of investors.
Under the proposed acquisition, Equinox and Leagold shareholders, respectively, would control approximately 55 per cent and 44 per cent of the company.
The all-stock deal would mark the latest merger in what’s turning into a boom year for the gold mining space. More than $30 billion of deals have been announced already, including multibillion acquisitions by Barrick Gold Corp. and Newmont Mining Corp., and more recently, there have been a spate of acquisitions of intermediate companies, such as Kirkland Lake Gold Ltd’s proposed $4.9 billion acquisition last month of Detour Gold Corp.
One clear driver of the merger mania has been the rising price of gold, which broke through US$1,400 per ounce in June for the first time in six years, and is driving increased interest and attention to the sector.
“Right now, I have such a strong conviction that we’re in the early stages of a bull market, so whatever we can buy today that has leverage to gold will offer fabulous value,” Beaty, who will remain chairman of Equinox, told the Financial Post.
Beaty and Woodyer, the chief executive of Leagold who is the proposed CEO of the combined company, have known each other for years and said they met for drinks in Vancouver this summer to discuss the tie-up. The past few months have been spent on due diligence, including site visits and meetings with bankers.
He added that the two companies had many similarities including cost and production profile. During the first three quarters, Equinox produced 115,000 ounces of gold from mines in Brazil and California at an all-in sustaining cost of US$983 per ounce. In comparison, Leagold produced 281,000 ounces at US$978 from mines in Mexico and Brazil.
“We went into this from an intellectual point of view and we said, ‘what do we need?’” Woodyer said in an interview.
In 2020, the company is expected to produce 700,000 ounces of gold and in conjunction with the proposed merger, the companies announced a $670 million financing package to fund upgrades that will boost production further to one million ounces in 2021.
Beaty committed to invest US$40 million at $8.15 per share, which makes him the largest shareholder with nine per cent. He also helped secure a US$130 million convertible debenture investment from Abu Dhabi’s sovereign wealth fund, Mubadala Investment Company.
Meanwhile, the combined company planned to refinance its debt with US$500 million from banks in term loans and a new credit facility. It said the money would be used to accelerate development projects at its mines.
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Woodyer said the financing ensures that the new company has a low cost of capital, which was estimated on the conference call to be the LIBOR rate plus two to three percentage points.
Both stocks saw muted reaction after the announcement: Equinox rose 0.74 per cent to $8.21 while Leagold rose 1.4 per cent to $2.74.
“While the mines acquired are far from the lowest cost operations, that was not the investment thesis at Equinox and the acquisition will increase the company’s leverage to the gold price,” John Sclodnick, an analyst with National Bank Financial wrote on Monday.
He added that the targeted annual synergies of US$10 million appear small given that both companies have offices in both Vancouver and Brazil. Still, he wrote there is no premium attached to the deal and concluded it was a positive merger.
Those targeted savings also answer investors’ cries for more consolidation in the gold sector to cut down on overhead expenses.
In September, for example, the Shareholders’ Gold Council reported that it analyzed 47 gold mining companies, and found higher general and administrative expenses on average than non-gold mining companies.
Single-asset and intermediate producers, in particular, had higher costs, pinned at 10 to 12 per cent of cash flows compared to 4.2 per cent for non-gold mining companies, it said.
According to the report, Leagold’s G&A expenses were pegged at 12.7 per cent, and Equinox 16.6 per cent of their EBITDA, or cash flows.
Beaty said that the combination would make sense.
“It’s a horribly overused term, but what you want to always end up with is 1 and 1 equals 3,” he said. “We think we’re doing that by having a larger company that will get a better multiple that will attract new investors, with lower overhead — that will create value.”
Within a year, the company should be re-rated to trade at a higher multiple of its net assets value, he said.