Gold Fields Ltd.’s GFI-N all-share takeover offer for Canada’s Yamana Gold Inc. YRI-T has run into turbulence, with investors in the venerable South African gold major worried about the lack of obvious cost savings, the dilution in their shareholdings and the rich premium it is offering for Yamana.
On Tuesday, Johannesburg-based Gold Fields said it had reached a friendly agreement to acquire Toronto-based Yamana for US$6.7-billion. Yamana shareholders are set to receive 0.6 of a Gold Fields share for each of their Yamana shares, which equated to a premium of 42 per cent over the market price last Friday on the New York Stock Exchange.
Founded in 1887 by British statesman Cecil Rhodes, Gold Fields is one of the world’s oldest gold mining companies. As extracting gold from South Africa’s deep mines has become increasingly high cost, and amid a difficult political climate, Gold Fields has diversified outside of its home country.
While the three-kilometres-deep South Deep gold mine in South Africa is still a core operation with decades of production ahead of it, the company’s portfolio now also includes mines in South America, Australia and West Africa.
Buying Yamana will elevate Gold Fields to the fourth-biggest global gold miner, with projected annual gold production of 3.4 million ounces.
“The rationale for the deal is consistent with other gold M&A in recent years, namely achieving scale for relevance to investors, as well as geographic diversification,” Fahad Tariq, an analyst with Credit Suisse, wrote in a note to clients.
Over the past few years, investors have rewarded acquirers for doing low or no-premium deals, such as Barrick Gold Corp.’s 2019 nil premium purchase of Randgold Resources Ltd., while they have punished those that dared to pay big premiums.
Last year, Fortuna Silver Mines Inc., which proposed a 40-per-cent premium takeover of Roxgold Inc. lost a fifth of its value on the day the deal was announced. Similarly, investors in Gold Fields took flight on Tuesday, driving its share price down 23.4 per cent in trading on the NYSE.
Josh Wolfson, director of global mining research at RBC Capital Markets, wrote in a note that the deal may make Gold Fields a “more relevant” gold investment over the long term. But given the sizable premium it is offering for Yamana, and the material dilution of Gold Fields’ own shares the deal entails, the shorter-term picture isn’t pretty.
“The motivation and merits of a transaction of this scale to Gold Fields in our view is not immediately justified,” he wrote.
Chris Griffith, chief executive officer of Gold Fields, said one of the main reasons for buying Yamana is that the miner’s production will grow over the long term, as opposed to falling after 2024 because of depletion.
“We’re thinking about the strategy of the company,” Mr. Griffith said in a conference call with analysts, “making sure that whatever we do is enhancing the pipeline.”
Yamana Gold was founded by former investment banker Peter Marrone in 2003. The miner produced 885,000 ounces of gold and 9.2 million ounces of silver last year. Its most valuable asset is its 50-per-cent stake in the massive Malartic mine in Quebec, which it co-owns with Agnico Eagle Mines Ltd. Yamana also owns smaller gold mines in Brazil, Chile and Argentina.
Before the deal was announced, Yamana shares had risen by 27 per cent this year, but were trading about 65 per cent below their all-time high, reached in 2012. The sizable discount had irked the company.
“The market is not reflecting our inherent fair value,” Mr. Marrone, executive chairman of Yamana, said in a conference call with analysts, as one justification for agreeing to sell the company.
Mr. Marrone added that Yamana will benefit from Gold Fields’ deep underground mining experience, and owing to the acquirer’s bigger size, the combined company should be in a better position to finance new mines.
He is also set to potentially receive a massive severance payout as part of the acquisition by Gold Fields. Yamana estimated in a regulatory filing earlier this year Mr. Marrone would receive cash severance of US$13.35-million if Yamana was acquired and he subsequently lost his job.
In such circumstances, Mr. Marrone would receive early access to long-term stock awards as well. Based on his current share ownership as disclosed in regulatory filings, those would be valued at $31.1-million at $6.80 a TSX-listed share, bringing his total exit package to just under $48-million.
Mr. Marrone has been criticized in the past for excessive compensation. In 2015, he lost a say-on-pay vote by Yamana shareholders. In 2019, proxy advisory service Glass Lewis gave Yamana a grade of F for compensation, and wrote the company had “a history of misaligning pay and performance.”
Mr. Marrone declined an interview request from The Globe and Mail.
Yamana shares closed at $6.80 on the Toronto Stock Exchange.
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