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It has come to this: the largest gold deal in a year is one where no premium is paid and no cash is exchanged.
During the commodity boom, miners of all stripes were scooped up at prices sometimes worth over 50 per cent of their market values. Three years after the bull run ended, Alamos Gold Inc. and AuRico Gold Inc. have proposed merging in a share-for-share deal worth $1.5-billion (U.S.) that contains no takeover premium whatsoever. The motivation is to combine finances and assets to make it through this storm.
To some, the deal is a beacon of hope. ‘Mergers of equals,’ as they are known, have been pitched like crazy for the past few years – multiple investment bankers stressed to me that this very combination has been pitched six ways to Sunday – but for the longest time, no two companies would take the bait. Now that two intermediate miners are finally acting on the idea, Bay Street hopes it will spawn more deals.
You can understand the optimism. Many dealers still hope to drum up business from miners – AuRico alone has 16 research analysts who cover the name – and they are looking for any sign that the tide is turning.
Such tie-ups can make a lot of sense. By combining forces, two decent miners can spread their costs over a bigger balance sheet, and consolidation should boost trading liquidity because there will be fewer names in the gold sector.
In this case, Alamos has a strong balance sheet with no debt and $358-million in cash and short-term investments, while AuRico has a prized asset: The Young-Davidson mine in Ontario, one of the safest political jurisdictions in the world.
Combined, 50 per cent of the merged company’s net present value will originate in Canada, and annual production will jump to over 700,000 ounces of gold. Net cash, meanwhile, will total $94-million.
But let’s not get too excited. The way the two companies are talking makes the deal sound downright transformational. On a conference call Monday, the companies’ respective CEOs were overly enthusiastic, calling it a “win-win” that will “unlock value.”
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