Gold mergers have no time for virus

$4B tie-up between SSR Mining in Vancouver and Denver-based Alacer Gold is one in a string of deals of late

In a reminder that some market forces still exert more power than the economic fallout from COVID-19, Vancouver-based SSR

Mining Inc. on Monday announced a no-premium, all-stock “merger of equals” with Denver-based Alacer

Gold Corp. that was months in the making and would create a US$4 billion company.

The deal marks the latest in a string of mergers in the gold sector during the past 18 months, a trend that has continued even as the coronavirus pandemic has radically handicapped investors’ ability to conduct due diligence such as site visits to mines.

During a presentation to analysts on Monday, Rod Antal, who will move up from chief executive of Alacer to chief executive of the newly combined entity, SSR, once the deal closes in the third quarter, bluntly dismissed coronavirus as a factor, saying talks started last November, allowing ample time for face to face meetings before the pandemic.

While the combination doesn’t offer any obvious operational synergies, and any savings on corporate expenses have yet to be calculated, Antal and outgoing SSR CEO Paul Benson promised that the scale and diversification of a combination would bring relevance in a world crowded with intermediate gold producers.

“At a time when investors are looking for exposure to rising gold prices, we’re very excited to be creating a larger more globally relevant gold company,” Paul Benson, outgoing chief executive of SSR told analysts.

Under that rationale, the deal fits into a wave of consolidation in the gold sector that analysts and say has been in progress for nearly two years. They have long said that there are too many intermediate gold producers, each with a risk-to-reward ratio that is too high to attract the attention of investors.

By merging, intermediates can cut their expenses; and a larger portfolio of mines also mitigates their risk because the output of any single mine is proportionately less significant.

That combination could attract new investors, and translate into higher trading multiples, which in turn would enable companies to raise money more effectively, analysts say.

“In the long term, merging may be what you have to do to survive or stay at the table, to have a chance at matching the (trading) multiples of the larger (gold mining) companies,” Michael Siperco, an analyst with Velocity Capital, told the Financial Post.

In a note Monday, Siperco suggested the gold sector has reached a critical juncture. In the past year, gold prices have surged 35 per cent from US$1,250 to US$1,696 as of Monday afternoon, which means gold miners’ margins are “set to explode.”

For the first time in years, he wrote that gold miners are in a position to compete with royalty and streaming companies — which invest cash upfront to develop a mine in exchange for ongoing payments. During the past decade, streaming companies have attracted more attention from investors looking for exposure to gold because they own a small piece of many assets, which creates a more risk-diversified portfolio.

But Siperco argues that after cutting expenses and paying down debt, the current rise in gold prices could change the dynamics of the sector, especially as interest rates in the U.S. and elsewhere around the world look poised to drop further — often correlated with a rise in gold prices.

“In a rising (gold) market, producers are still the best way to generate returns for investors, with valuations still near cyclical lows,” he wrote.

Thus, even as COVID-19 has upended the normal due diligence process, which for mines, generally includes site visits, a number of deals have materialized in recent weeks.

In March, Endeavour Mining Corp announced a $1-billion deal to purchase Semafo Inc., uniting two producers in West Africa.

In April, Silvercorp Metals Inc. announced a $105 million deal to purchase Guyana Goldfields Inc., which operates a mine in the Latin America’s Guyana. On Monday, Gran Colombia Gold Corp. proposed a counter three-way merger with Guyana and Gold X Mining Corp.

Last week, China’s Shandong Gold Group announced it would pay US$149 million for TMAC Resources Inc., which operates a single mine in Nunavut.

Consolidation has been occurring since at least 2018 when Barrick Gold Corp acquired Randgold Resources Ltd. for US$6 billion in a no-premium merger.

After that deal, Ian Telfer, then chairman of Goldcorp Inc., told the Financial Post he felt pressured to find a merger partner for Goldcorp, comparing it to a game of “musical chairs,” in which every company would soon link up with another.

Last year, Newmont Mining Corp. acquired his former company for US$10 billion, and moved its headquarters to Colorado. A wave of other deals have followed, some of which have also resulted in the elimination of Canadian head offices.

In the latest deal, SSR will continue in name, but its headquarters will move to Denver where Alacer has been based. The combined entity is expected to produce 780,000 ounces of gold per year, with about US$450 million per year in free cash flows. Given that SSR operates mines in Canada, the U.S. and Argentina while Alacer operates a mine in Turkey, the combined entity would also have greater jurisdictional diversification.

Initial market reaction to the deal was not positive. SSR’s share price had dropped 5.5 per cent to US$17.12 and Alacer dropped 2.93 per cent to $7.95 by Monday afternoon.

Antal framed the deal as unrelated to either the rising gold price of the pandemic.

“We wanted to bring together the two companies (in a way) that we didn’t have any transfer of value,” he said.

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