Agnico Eagle Mines Ltd. (AEM-T) has reached a friendly agreement to buy TMAC Resources Inc. (TMR-T) for $289-million mere weeks after the Canadian government rejected Chinese state-controlled Shandong Gold Mining Co. Ltd.’s attempts to buy the struggling Arctic miner.
Toronto-based TMAC operates the Doris gold mine in Hope Bay, Nunavut, near tidewater in the Northwest Passage, a highly strategic shipping route connecting the Atlantic Ocean to the Pacific. The attempted takeover of the firm by Shandong generated a national debate about sovereignty in Canada’s Far North and whether China should be allowed to gain an economic foothold in the High Arctic.
In late December, the Ministry of Innovation, Science and Economic Development turned down Shandong’s $207-million offer on national security grounds. TMAC was already in bad financial shape before the Shandong proposal was tabled in May; the evaporation of the Chinese offer put the company’s long-term future in jeopardy.
Agnico on Tuesday agreed to pay $2.20 a share for TMAC, a 44-per-cent premium compared with its Monday closing price, and 26 per cent higher than the $1.75-a-share Shandong bid.
“We just think this is the right thing to own and to buy at this point in time, because it’s typical of the things we tend to do very well with,” said Sean Boyd, chief executive of Agnico.
“Get them early on at good price, and just work them patiently and put the right resources to work.”
The Doris mine went into production in 2017 and has consistently bled money, largely because of an underperforming mill. Only in recent quarters have there been signs of improvement, with the company generating about $25.5-million in free cash flow during the past quarter. TMAC had $170-million in debt coming due in the summer that it was not in a position to pay back, which Agnico will assume. As an experienced operator in the Arctic, Agnico is better positioned than perhaps any other gold company in the world to make a success out of Doris.
“Nobody can challenge that this is the absolute best outcome,” said Jason Neal, CEO of TMAC.
“Working in the Arctic is tough. There’s lots of infrastructure challenges, the communities are spread out, there isn’t a ready made and highly skilled workforce. Because Agnico’s operated in Nunavut since 2007, they have the best ability to generate a great outcome for all the stakeholders, for the communities, the employees, and shareholders. "
Still, Agnico will face significant challenges in making Doris sustainably profitable. Other large miners, including Newmont Corp., have tried and failed, and more than $1.5-billion has been spent on the site over the years, with little success as of yet.
In a note to clients, Josh Wolfson, analyst with RBC Dominion Securities Inc., said that additional investment into the mine could dampen Agnico’s forecasted cash flow. One of the key questions, he said, is “what level of capital spending is required to stabilize operations?”
TMAC had previously said nearly $700-million was needed to build a new mill at the Doris site. However, Mr. Boyd said that Agnico will not be building a new mill right away and will instead tweak the current operation, which he says can continue to generate free cash flow at current gold prices.
“We don’t see us investing massive amounts of capital here for a couple of years,” he said. “We need to drill it, understand it a bit more, optimize and improve what they’re currently doing.”
Mr. Boyd said that Agnico considered buying TMAC earlier in 2020, ahead of the offer from Shandong, but decided against proceeding because it faced several operational challenges at other mines. The deal eventually came came together after the Shandong transaction was rejected, in part because Agnico had already conducted its due diligence. This transaction will not require a shareholder vote from either TMAC or Agnico shareholders and is expected to close in about a month.
Reserve replacement is one of the biggest challenges the gold industry faces amid a dearth in new discoveries, and Doris adds about 3.5 million ounces of new gold reserves to Agnico’s war chest, and roughly seven million ounces in the economically unproven resources category.
“Agnico’s management team has consistently communicated that the company’s M&A strategy is to acquire earlier stage projects with geological potential, so it can leverage its technical capabilities, with a preference for Canada. Hope Bay meets this criteria,” Fahad Tariq, analyst with Credit Suisse, wrote in a note to clients.
Still not everyone was happy with the deal.
Daniel McConvey, portfolio manager with New York-based Rossport Investments, and a shareholder in TMAC, thinks that TMAC is being sold at an excessively low price when compared with the valuations of similar assets. He would prefer it remain as a standalone, even in the face of so many hurdles.
“I’m disappointed,” he said.
“This is a very cheap transaction. It’s a steal.”
Shares in TMAC surged by 39.5 per cent to close at $2.19 a share on the Toronto Stock Exchange, while Agnico shares fell by 2.2 per cent to $94.07 a share.
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