Review: Gold M&A deals since 2010 Review: Gold M&A deals since 2010
40% of the deals assessed aren't viable at today's prices
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2015-12-17
Raymond James analyst Phil Russo reviewed 67 mergers and acquisitions (M&A) in the gold space since 2010 to determine how many are viable producing, developing and streaming deals. He found 40% of transactions would not recoup their total costs based on current reserves and resources at today’s gold prices.
In an emailed response to questions, Russo concedes that he largely expected the negative outcome given the number of bad deals, but not the magnitude of the loss, or the pricing environment those transactions need to become “better or breakeven deals.”
“The gold space needs higher prices to rationalize deals or there needs to be incremental reserve and resource growth shown post-transaction.”
Despite the different metrics used to gauge the economics of a deal, Russo argues a transaction can be considered a success if it covers its total cost. That includes upfront acquisition costs and any initial development capital required before producing cash flows. To assess a deal’s total cost he used two metrics — payback period and internal rate of return (IRR).
“We observe in the industry the rationale for M&A being driven by net asset value, production, cash flow, reserve, diversification, et cetera metrics, but rarely do we hear executives discuss the recoupment of all capital — that is total cost. We’d like to see more discussion on that principle which is where the real benefits flow to shareholders.”
Using a US$1,150 per oz. gold price, the analyst calculated the payback and IRR of each deal’s total cost. He also projected the commodity price required for each deal to break even and the metal price required to produce a 10% IRR on total costs.
Of the 67 transactions assessed, an estimated 27 are unable to repay their total costs in today’s commodity price environment. That group consisted of 26 producing and development deals and one royalty/streaming transaction. That latter deal was Silver Wheaton’s (TSX: SLW; NYSE: SLW) stream on Hudbay Minerals’ (TSX:HMB; NYSE: HBM) 777/Constancia assets.
For the 40 deals that could recoup their total costs, the report indicated an average payback of 11 years. The best payback was on Northern Star Resources’ (ASX: NST) acquisition of Newmont’s (NYSE: NEM) Jundee mine at 1.1 years, with the worst being on Silver Wheaton’s streaming deal on the Antamina mine at 23 years.
On a total cost basis, the average IRR of the 67 transactions reviewed were 2%. Northern Star’s Jundee purchase topped the list with an IRR of 91%, while Endeavour Mining’s (TSX: EDN) Nzema deal finished last with a negative 33% IRR.
Russo points out if the gold prices remained unchanged from the date of each acquisition, the average IRR for the total transactions would have been roughly 9%, versus 2% today.
The overall best economic deals include Northern Star buying Jundee and Barrick Gold’s (TSX: ABX; NSYE: ABX) Kanowna Belle/Kundana assets; OceanaGold’s (TSX: OGC; ASX: OGC) acquisition of Newmont’s Waihi mine; and Coeur Mining (NYSE:CDE) picking up Goldcorp’s (TSX:G; NYSE: GG) Wharf mine.
All these deals have high IRRs, short paybacks and low breakeven gold prices.
For example, the Jundee transaction has a 91% IRR, a 1.1-year payback, with estimated gold prices of US$853 per oz. to breakeven, and US$880 per oz. to produce a 10% IRR. If the gold price remained at US$1,296 per oz. — the same as on its acquisition date — the total deal IRR would be 134% today.
The worst three overall economic deals include Barrick’s Equinox transaction, with a payback shortfall on the total costs of US$8 billion, and a required copper price of US$6.20 per lb. to breakeven. Kinross Gold’s (TSX:K; NYSE: KGC) Red Back acquisition, with a US$4.8 billion payback shortfall, and a gold price of US$1,740 per oz. to breakeven. Goldcorp’s Andean Resources (Cerro Negro) transaction, with a US$2.7 billion payback shortfall, and a breakeven gold price of US$1,600 per oz.
When ranking the 67 transactions on what the gold price has to be to recoup total costs, streaming deals were in the bottom quartile for breakeven prices, supporting their lower risk perception, Russo says. (The report included 16 royalty/streaming deals.)
The analyst also used payback and IRR metrics on potential M&A candidates in Raymond James’ coverage universe, including Asanko Gold (TSX: AKG; NYSE-MKT: AKG), Guyana Goldfields (TSX: GUY), Kaminak Gold (TSXV: KAM), Alacer Gold (TSX: ASR; ASX: AQG), Roxgold (TSXV: ROG) and Orezone Gold (TSX: ORE). He found all fared well on a total cost IRR basis, assuming a 40% to 70% premium on takeout.
Larger M&A candidates Detour Gold (TSX: DGC) and New Gold (TSX: NGD) also fared positively, with both requiring gold prices of US$1,050 per oz. to breakeven, which is below the average of the previous 51 transactions of US$1,270 per oz.
The two candidates that stood out at today’s commodity prices are Alacer and Detour, Russo says.
“Not often flagged as a candidate, Alacer screened well with its long life, low cost pler asset showing good breakeven and IRR.”
Detour, often viewed as a takeover candidate, screened well considering “large size deals have a harder time showing positive numbers,” Russo explains. “It can breakeven at lower prices and produce a positive return if you bought it for a 40% premium today.”
“The fact our candidates show good numbers today implies attractive price points today for the stocks, if all else is equal,” Russo concludes.
- See more at: https://www.northernminer.com/news/review-gold-m-a-deals-since-2010/1003738935/#sthash.x6P1beBZ.dpuf