AuRico Gold Inc. has a prized asset to bring to a merger with Alamos Gold Inc.: The Young-Davidson mine in Northern Ontario.
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."
That's a stretch. Even though the broad strategy makes sense, it may not be enough. No matter how solid a miner may look, it is still susceptible to the underlying commodity price. And gold, in case you haven't noticed, is still hovering around $1,200, well below levels many producers consider healthy.
The main selling point of this deal is also rather shaky. On the conference call Monday, both CEOs, stressed that their proposed combination should lead to a 're-rating' of trading multiples. "The key premise here" is the re-rating, AuRico CEO Scott Perry said, while Alamos CEO John McCluskey swore the merger provides a "significant re-rating opportunity."
Gold miners trade in a unique way, and they are often judged on the ratio of their market price to net asset value. Historically, a quality producer would trade at a multiple of, say, two times its net asset value, while a struggling miner would trade at 0.5 times.
Combined, Alamos and AuRico will trade at 0.7 times their net asset value, and the two firms' CEOs expect that by combining forces they'll be rated even higher. The hope is that their supposed newfound strength will boost the multiple.
But this game ain't what it used to be. Ever since the commodity boom went bust, only the top-tier firms, such as Agnico Eagle Mines Ltd., trade at strong ratios. The multiple bandwidth, so to speak, isn't nearly as wide anymore, which means Alamos and AuRico combined may get a lift, but not by much.
And if the multiple doesn't jump, the deal's rationale really starts to break down. Under the current structure, neither company's shareholders receive a premium – so if they don't buy into the multiple story, a tie-up is far from certain.
Skeptics may wonder why these companies simply didn't put themselves up for sale instead. Asked on the conference call if they entertained other offers, the CEOs were cautious with their words. Mr. McCluskey, for instance, said he "didn't run an [auction] process on selling Alamos outright" – but that doesn't mean takeover offers haven't come in over time. Alamos did not respond to a request for comment.
The big question now is what happens if a new bidder emerges before shareholders vote on this deal. The two companies are acutely aware that this could be a problem. "The biggest threat to the transaction not closing is an interloper coming in," Mr. McCluskey acknowledged on the call.
And that is likely a key reason why Alamos is buying a 9.9-per-cent stake in AuRico, regardless of what happens to the merger. With this position, it will have more say in a vote.
For shareholders wondering whether this merger is the best way to get the best bang for their buck, they should keep Mr. McCluskey's own words in mind.
"For us, it's been a long-term goal to acquire a Canadian asset," he said, because long-life, good-quality assets "are difficult to come by."
If he's right, expect a new bidder to emerge – and offer some sort of premium.
Tim Kiladze