NorthernStar to Acquire Saracen Mineral for $4.1 bn
By: Alexander Anderton, Pradeep Buttar, Jeevan Sembi, Navya Dikshit
Overview of the deal
On October 5th, Northern Star Resources announced their decision to buy Australian competitor Saracen Mineral Holdings, a deal that will create Australia's second largest gold miner and a Top - 10 global gold producer in market value. The combined firm will be positioned for market leading growth across Australia and Alaska.
According to a report published by Northern Star, the merger will allow the combined entity to target 2M ounces of gold production by 2027 and increase gold production by an upwards of 30 percent in the next three years. The deal is expected to realise around A$2 Billion in geographic, operational and strategic synergies by leveraging existing systems and cost structures and utilising Northern Star’s underground and Saracen’s open pit expertise.
Company Details: Northern Star Resources Limited
Northern Star Resources Limited is a global - scale Australian gold producer, deriving revenue from gold mining and exploration operations. Their projects are located in Australia and North America. They have rapidly transformed from a 100,000oz per year single mine producer in 2010, to a total annual production of 840,580oz by operating three concentrated centres as of 2019. According to the firm, the acquisition of these operations has given Northern Star the opportunity to grow the resource base of their mines by investing heavily in near mine and in mine operations.
Founded in: 2000
Headquarters: Subiaco, Australia
CEO: Stuart Tonkin
No.of employees: 2.64K
Market cap: $10.45bn
LTM Revenue: $1.97bn
LTM EBITDA: $0.75bn
LTM EV/Revenue: 5.88x
LTM EV/EBITDA: 15.44x
(All values are in Australian Dollars).
Company Details: Saracen Minerals
Saracen Minerals Holdings is an Australian gold growth company with three mines located in Kalgoorlie, Australia. The company has delivered sector leading financial results. According to their website, their investments in exploration, technology/ innovation and ESG is predicted to deliver further growth in production, mine life and shareholder returns.
Founded in: 1987
Headquarters: Perth, Australia
MD: Raleigh Finlayson
No.of employees: 504
Market cap: $5.80bn
LTM Revenue: $1.07bn
LTM EBITDA: $0.45bn
LTM EV/Revenue: 5.69x
LTM EV/EBITDA: 13.53x
(All values are in Australian Dollars).
This merger will see Northern Star Resources and Saracen Mineral Holdings combine to form Australia’s second largest gold miner, and the world’s 8th largest gold miner. Analysts expect this deal to create “a globally competitive gold miner”, by consolidating mining assets in Australia. Consolidation of ownership of the Super Pit in Kalgoorlie will also take place. This is the second largest gold mine in Australia and has not been under full ownership for 125 years. Prior to this, the Pit was under 50/50 ownership by Northern Star and Saracen. This means the pair already have links in a joint venture, allowing minimal takeover friction.
The combined company will be split into three production centres, allowing for infrastructure from the two companies to be combined (which is beneficial as these companies have a history of cooperation), particularly in Australia’s Northern Goldfields region. Northern Star will give 0.3763 shares for every Saracen share, resulting in a 64% 36% ownership split in Northern Star’s favour. Northern Star will also be paying a 38 cents per share dividend on their shares. In reaction to the public announcement, Northern Star and Saracen saw their stock prices jump by 11% and 10% respectively.
With regard to the longer-term impact of this deal, a merger creating the world’s 8th largest gold mining company, shows signs of consolidation amongst the gold mining sector. Despite 2018 and 2019, deal making in the gold sector has been declining since 2015. This merger may signal the start of a new phase of deal activity in the gold sector, especially as gold is being used as a safe haven, in order to hedge against the pandemic. Evidence for this pivotal moment exists within the gold market, where gold prices have been rising 26% this year to $2000 per ounce.
As a result of the steady growth in the value of gold over 2020, by 2027 Northern Star aim to produce 2 million ounces of gold per year which is only 200,000 ounces behind Australia’s largest producer. This will be a 30% increase in production over 7 years from their 1.6 million ounces currently produced. On top of this, there is an estimated $2Bn cost saving due to the synergies achieved between the two companies, that will be fully exploited within the next 10 years.
Given the current economic environment we live in, there are increasingly large number of investors flocking back to the gold market as a haven to hedge investments, interest for this asset has spiked since Q1 2020. This shows what a resilient investment gold continues to be as a countercyclical investment.
Risks and uncertainties
Overall, the internal risk of the venture is predicted to be low. The 26% rise in gold values this year cements the precious metal as a ‘safe haven’, and synergies and dynamic efficiencies between the two firms projected to be high. The nil-premium setup confirms the deal has a ‘win-win’ outlook, as greater economies of scale and cost consolidation will lead to sharpened operational efficiencies, generating a wider net of investors, and increased market share. Given the amicable nature of the merger, the 64/36 split is unlikely to create any friction with respective shareholder and management teams.
However, external risk has ascended to become a priority. The geopolitical uncertainty preceding the US election seemed to have little impact on gold prices, peaking at $1960/oz. The announcement of the Pfizer vaccine on Nov 9th increased general market optimism, therefore rapidly depleting gold values by 5% overnight. As the Covid-19 pandemic could perhaps be in its twilight, short-term outlook may harm the prices of gold, reducing demand and investor interest for the newly merged firm. Moreover, high risk M&A activity in the golf mining industry in 2013 coincided with an unsustainable bull market, costing shareholders dearly - therefore exemplifying potential risks to all stakeholders.
Despite gaining critical mass in Australia, becoming 2nd largest in its country and in the top 10 globally, further external risk can be onset as they expand in a competitive sector. Newcrest mining remains the Australian industry leader by market share - with a current market cap of $24.8bn, compared to $9.8bn and $5.1bn for Northern Star and Saracen respectively. its efficiency in gold production is yet to be matched, ascertaining to continued competitive risks to the two firms, as global investment May remain focused on Newcrest.
Long-term risks may also emerge - gold is a finite resource after all, and in an ever-volatile market place, marked by ongoing macro-political headwinds, the outlook for gold is more uncertain than its track record suggests. however, the primary risk outlook of the merger seems low - strong internal potential combined with the haven status of gold ensures the growing complexity and diversity of interests into the market confirms the newly merged firm as a growing industry leader - with new efficiencies leading to a greater potential of growth when compared to rival firms. Overall, confidence continues to be high as the merger continues.