On face value, last week’s acquisition by Bill Beament’s Northern Star juggernaught of a 16.4 per cent stake in Echo Resources (80 million shares at an average price of 29c each) was no big deal.
Northern Star’s Jundee mine sits at the northern end of the Yandal belt in Western Australia and Echo has its foot on the southern end, with its currently-mothballed Bronzewing treatment plant its centrepiece.
Echo has well-flagged plans to become a 100,000oz-a-year gold producer at an all-in sustaining cost of $A1034 for the knockdown capex commitment of $20 million, courtesy of the pre-existence of the Bronzewing plant.
And it recently delivered a reserve upgrade in support of the plan – 15.6 million tonnes at 1.7 grams of gold a tonne for 856,000 ounces – enough to support an initial 8.5 year mine life with further upside from exploration.
The new reserve estimate is being plugged into a feasibility study which is due to be released in the March quarter next year, with first production possible late next year.
Northern Star obviously harbours thoughts about consolidating the Yandal belt, with its Echo stake getting it off to a flying start, should it decide to make a bid for Echo.
A bid is certainly within Northern Star’s means. At last count it was debt-free and was holding $433m in cash. At its current share price of 29.2c, Echo would be a $142m quarry (without applying a standard 30 per cent takeover premium).
Today’s interest though is not in whether Northern Star follows up with a bid for Echo. It’s about what the Northern Star move on to the Echo register tells us about the broader merger & acquisition dynamics of the gold explorer-developer sector.
Thanks to bumper margins of more than $500 an ounce, the established gold producers are dripping with cash. So much so they need to create options on how to spend it. M&A with their peers is not on the agenda because the producers are by and large fully priced. Egos are also a stumbling block.
Short of showering shareholders with cash, the producers have turned to stepped-up exploration programs. But the cash build within the producers is at such a rate that even stepped-up programs barely make a dent in the cash piles.
So what the Northern Star move on to the Echo register says is that the producers are looking to M&A in the explorers and developers to expand their growth options. Northern Star is not alone. Newcrest and St Barbara have been active in the space as well.
Plus, Genesis working its way on to the M&A radar as drilling highlights gold project development potential. Read more +
