Is it a good idea to merge at the height of a price boom for your one and only product – such as gold?
Some analysts would see yes because that allows shareholders in the merging companies to maximise their returns.
Others though say that companies merging when prices are high quite often do not reap the benefits planned from the deal because they are already priced into the market values of the companies.
And, of course, course, product prices, especially commodities such as gold, can be quickly undone by rapid falls in prices or changes in currency values.
Mergers are quite often more rewarding when prices for commodities or products are depressed – oil and gas for instance and the benefits easier to win from cost-cutting and eliminating overlaps.
So then what will be the fate of the planned $4.1 billion, mostly paper merger between Saracen and Northern Star?
The news saw Saracen shares jump nearly 10% to $5.72 while North Star shares rose 10.6% to $15.29. Shares in Westgold also rose, up 7% and Silver Lake shares were up by 6%.
Having revealed their hand, will a big player like Newmont or Barrick emerge with an all-cash offer? Will Newcrest, the largest Australian miner, try and disrupt the deal (Newcrest revealed yesterday it is planning to list on the Toronto Stock Exchange).
Investors yesterday appeared to rule out Newcrest – its shares fell 0.2% to $31.06.
The selling point is that the merged company will rank in the ten biggest producers worldwide and expand output at a time of record and near-record gold prices and unite ownership of the huge Kalgoorlie Open Pit mine.
The decision to merge comes as global gold production has fallen in the past year thanks to a combination of COVID-19 on mines in some countries and the impact of the pandemic on global demand. In fact, global gold output fell 5% y-o-y in the June half, to 1,603.6 tonnes the lowest June half figure since 2014.
Prices topped the $US2,000 an ounce level and peaked at $US2,089.20, fell back under $US1,900 an ounce in September and regained that level late last week.
The record prices seems to have been a deciding factor in this merger.
That involves boards of Northern Star and smaller Saracen unanimously recommending the tie-up. They have entered into a binding agreement to combine via a scheme of arrangement.
In a statement to the ASX on Tuesday, they said the deal would create a company with the scale and quality to attract gold-focused and generalist investors, and potential to target 2 million ounces of gold by 2027 (that’s less than what Newcrest now produces).
“This is one of the most logical and strategic merger-and-acquisition transactions the mining industry has seen,” Saracen BEO Raleigh Finlayson said.
“The savings, the synergies and growth opportunities it will generate make the transaction extremely compelling.”
Under the terms of the deal, which the companies say would achieve up to $2 billion in cost savings, Saracen shareholders would receive 0.3763 Northern Star shares for each Saracen share on the record date and a special dividend of 3.8 cents a share.
Shareholders of Northern Star would own 64% of the combined entity and Saracen shareholders would own the remaining 36%.
The proposed merger comes after Saracen and Northern Star each bought 50% stakes in the Kalgoorlie Super Pit in late 2019 and will now join the two together if the merger happens.
