Gold miners have focused in recent years on creating not just bigger companies but also better ones. Managers have prioritized increased efficiency and free cash flow, rather than merely mining more ounces. A pending merger of two small-cap miners, SSR Mining and Alacer Gold, is emblematic of the trend, and a model for the industry’s newfound focus on generating better shareholder returns.
Last month, SSR (ticker: SSRM) and Alacer (ASR.Canada), each with roughly $2 billion in market value, announced plans to combine in a no-premium merger of equals, with Rod Antal, Alacer’s chief executive of seven years, becoming CEO of the combined company, which will take SSR’s name. SSR’s current chairman, Michael Anglin, will chair the enterprise, with the board split down the middle. SSR and Alacer have complementary strengths, and the combined company’s increased scale is expected to provide a bevy of financial benefits. As a result, the market is likely to reward the new SSR with a higher valuation than either company could have achieved on its own.
“What I like so much about this is that it’s a merger of equals,” says Joe Foster, a portfolio manager and head of the gold investment team at VanEck. “We’ve seen so many companies overpay for acquisitions in the past.”
SSR’s current CEO, Paul Benson, will leave the company once the deal closes this summer. “The last thing a CEO needs is the former CEO sitting behind him whispering advice in his ear,” says Benson. “I’ll remain a shareholder, and I’ll be cheering loudly from the stands, but I will step away.”
Barrick Gold (GOLD) kicked off the trend toward zero-premium mergers in the gold-mining industry when it combined with Randgold in January 2019, and several other mergers of equals followed. Few costs can be eliminated in a merger of mining companies, making acquisition premiums hard to justify. Other than some redundant overhead, the operations of physically distant mines can’t be streamlined.
Still, at-the-market mergers of smaller gold miners can enhance the strengths of two companies whose whole is greater than the sum of their parts. Vancouver-headquartered SSR brings a pair of gold mines in Nevada and Saskatchewan and a silver mine in Argentina. Adding Alacer’s larger Çöpler gold mine in eastern Turkey will give the new company a more well-rounded portfolio, with a long-life cornerstone asset and greater geographic diversification. Postmerger, SSR will produce almost 800,000 ounces of gold annually at an all-in sustaining cost of about $900 per ounce.
Technological skill sets are also complementary. SSR and Alacer utilize different mining and processing techniques at their sites. The combined company will have the capabilities needed to pursue a wider range of potential projects. “There should be no ore body left on the planet that we should be scared about taking on,” says Benson.
And postmerger, SSR will have greater financial capability to pursue those projects. Analysts project roughly $450 million in annual free cash flow in coming years at the current gold price of about $1,676. The company can fund exploration and expansion projects internally without taking on debt. Both companies have solid balance sheets, and SSR will have almost a dollar a share in net cash after the merger.
The combined company’s balance sheet and cash flow mean that a shareholder-return program is likely to be announced once the merger is completed, in the form of a dividend, share buybacks, or both. That could increase SSR’s appeal to a broader range of investors, while a doubling in market capitalization and trading liquidity will expand the universe of funds able to invest in the shares.
The result could be a higher price/earnings ratio than the 11 times next year’s estimated earnings that SSR’s and Alacer’s shares both command currently. Gold-industry giants Barrick and Newmont (NEM) each trade for more than 21 times forward earnings.
Merging to Create Better Companies
In recent years, several gold miners have combined in mergers of equals. Their stocks have outperformed the industry and the market. SSR Mining’s should too.
*Through June 5
Source: Bloomberg
Prior zero-premium mergers of small-cap gold miners, including the recent Equinox/Leagold and Argonaut/Alio deals, helped the surviving stocks outperform the VanEck Vectors Gold Miners exchange-traded fund (GDX) and the S&P 500 index in the months after the deals closed, and SSR should follow the same course. Analysts who updated their models after the merger was announced have an average price target for SSR of about $28 a share—55% above the $18 at which SSR’s U.S.-listed stock recently traded. Analysts’ price targets are based on expectations for multiple expansion and profit gains.
A rising gold price has provided an outsize tailwind for gold-mining stocks of late, as the companies’ costs stay relatively constant. Since the Federal Reserve began cutting interest rates last year, gold has climbed nearly 30% an ounce. The rally intensified in 2020 as investors’ flight to safety during the pandemic boosted gold and other haven assets, although gold has retreated 5% since mid-April as the stock market rallied.
Barron’s has written favorably about gold and gold miners in recent months. The outlook remains supportive: Continued economic and financial uncertainty and negative real interest rates in most of the world should keep gold prices high. Foster sees gold reaching $2,000 an ounce over the next 12 months.
That could provide additional upside for SSR stock, but the merger doesn’t need a higher gold price to be successful. Neither do other potential zero-premium combinations of small-cap gold miners looking to create stronger businesses.
“We believe the market has been critical of value-destructive and lofty premiums being paid in previous mergers, and that this new trend is a refreshing method of value creation to form better combined companies,” wrote Desjardins Capital Markets’ precious metals analyst David Stewart in a recent report. “Given how well this M&A strategy has been received by the market, we would expect it to continue, and more single-asset junior producers could follow suit.”
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
"company" - Google News
June 06, 2020 at 04:47AM
https://ift.tt/30em4O0
Gold-Mining Merger Could Add Sparkle to This Company’s Shares - Barron's
"company" - Google News
https://ift.tt/33ZInFA
https://ift.tt/3fk35XJ
Bagikan Berita Ini
0 Response to "Gold-Mining Merger Could Add Sparkle to This Company’s Shares - Barron's"
Post a Comment