Australia | Oct 07 2020
Northern Star Resources and Saracen Mineral Holdings have agreed to merge and will become a dominant player in Australia's key gold districts.
-Should attract more generalist investors
-Pairing expands growth options
-Scope for further expansion via M&A
By Eva Brocklehurst
The geographic concentration in Western Australia's gold districts will allow for optimisation of mine sequencing, infrastructure and growth investment and the merged company, operating under Northern Star, is targeting over 2m ounces of annual production by FY27.
This is one of the most logical pairings, in Credit Suisse's view, as it brings together to miners well known to each other with co-located assets across two regions (Kalgoorlie, Yandal) that offer flexibility and optimisation benefits.
Skills are also complimentary with Northern Star's strength in underground and offshore mining and Saracen's in open pit. Thunderbox (Saracen) will combine with Yandal (Northern Star) for 600,000 ounces and Pogo (Northern Star, Alaska) is expected to contribute around 300,000 ounces down the track.
Synergies are guided at $1.5-2.0bn pre-tax over 10 years, which the broker calculates, on a post-tax basis per share, equate to $0.91-1.21/share. Northern Star remains Credit Suisse's preferred large gold exposure, based on valuation, growth and leverage to the gold price.
The merger will be by way of a scheme of arrangement and Northern Star will offer 0.3763 shares for each Saracen share held. Saracen will also pay special fully franked dividend of 3.8c. The first court hearing for approval of the scheme will be in December 2020 and implementation is set for February 2021.
Morgan Stanley assesses the merger provides new scale that will attract more generalist investors. The merged business will boast the sixth largest market capitalisation and eighth largest gold production, globally.
Given the absence of a premium, Citi asserts Saracen will need to sell the idea to shareholders as a valuation uplift in order to make the deal look attractive. The broker agrees the combined business makes sense operationally, particularly in Western Australia, and scale will attract generalist investors and higher multiples.
While cognisant of the compelling rationale, Ord Minnett requires further detail on the proposed merger before amending its view, retaining a Lighten rating on Northern Star and a Hold rating on Saracen.
For the first time, the Super Pit, currently 50:50 owned, will be under a consolidated team combining both operations to create a production centre of more than 1mozpa, offering sizeable reserve and growth opportunities. Post completion, Northern Star shareholders will own 64% of the merged business.
UBS explains Northern Star had planned to grow Yandal but there was a capital cost decision regarding whether to expand milling capacity at Jundee or refurbish the mothballed Bronzewing mill. Jundee has better infrastructure but is located to the north of the tenements so trucking costs are greater. Hence, a merged entity may choose to expand the Thunderbox mill instead of refurbishing Bronzewing.
In Macquarie's view, the most significant synergies/optimisation will be obtained with Fimiston South stage 2 along with the potential for the mill at Thunderbox to process Yandal ore. Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, agrees the Fimiston underground provides further options down the track and retains a Buy rating for Saracen and a Neutral rating for Northern Star.
Canaccord Genuity, also not one of the seven, moves to a Buy rating on Northern Star based on the enlarged production profile, noting free cash flow yields increase to 9% over FY22-23. The broker also envisages scope for the new entity to expand further via M&A, highlighting companies such as Bellevue Gold ((BGL)), Apollo Consolidated or Tanami Gold ((TAM)) as logical bolt-ons.
Ord Minnett, too, expects further M&A in the gold sector, noting growing urgency across peers with maturing portfolios and less organic options compared to those of Northern Star and Saracen.
UBS asserts this is a rare example of a mining merger that has clear and material synergies along with scale, diversity and three production centres located in tier-1 locations. In this regard, Citi points out the wording surrounding the third production centre, North America, leaves open the interpretation regarding further acquisitions in the Americas.
FNArena's database has one Buy rating and three Hold for Saracen with a consensus target of $5.83 that suggests 1.7% upside to the last share price. Northern Star has a target of $14.39 that suggests -5.6% downside to the last share price with one Buy (Credit Suisse), three Hold and one Sell (Ord Minnett) rating.
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