The big news in the gold mining industry on Monday was the announcement of an
“at-market merger of equals” with
SSR Mining Inc (US:SSRM / CAN:SSRM) and
Alacer Gold Corp (CAN:ASR / US:ASRPF).
The combine entity will be a $4 billion market cap intermediate gold (and silver) producer, with annual pro forma free cash flow of ~US$450 million. Combined operations are expected to yield total production of ~780,000 gold-equivalent ounces per year, with all-in sustaining cash costs (AISC) of approximately US$900/oz.
The synergies here are not geographic. The two companies’ operations are spread across the United States, Canada and Turkey.
Rather, this is about two like-minded mid-tier gold producers merging to create a more robust corporate entity. Read through the
presentation that accompanies the announcement and the theme is clearly “balance sheet strength”.
The new company will have free cash flow that puts it near the top of the industry among intermediate producers. Along with this is ~US$700 million in consolidated cash and marketable securities.
This is also a story about ounces in the ground: resources and exploration potential.
Together, the new company will have total resources of over 12 million ounces gold, 664 million ounces silver, 33 million lbs copper, 3.9 billion lbs zinc, and 1.8 billion lbs lead.
In addition, management of both SSR Mining and Alacer Gold are very bullish about the exploration potential, both with respect to operating mines and development projects. This means organic growth in production and the potential to significantly extend mine life of existing mines.
Just yesterday, we noted that one of the “indicators that there is a new bull market for gold” was the sudden explosion in new financings in the industry.
We could have also added another indicator of a new bull market:
increased M&A activity. From buying individual properties all the way up to take-outs, ‘tis the season for acquisitions in the gold mining industry.
Indeed, while gold mining investors will be eying this new merger with interest, another group of eyes will be looking at this combined entity with even greater interest. The senior gold producers.
We have already mentioned on more than one occasion the
“crisis in gold reserves” among senior gold producers. Steady declines in the ounces-in-the-ground for these companies have take their collective gold reserves to multi-decade lows.
The senior gold producers are notorious for three things:
- Underperforming versus the junior and mid-tier mining companies during any/every major rally
- The near-complete absence of organic growth in production
- Over-paying for acquisitions
It doesn’t take a rocket scientist to understand that (1) is the direct result of (2) and (3).
The bankers who run these major gold producers will be eying this merger and salivating.
They need the additional gold resources. They need the development/exploration pipeline. And the robust free cash flow would go a long way toward financing an acquisition.
Don’t be surprised to see this new mining entity being itself acquired by one of the Seniors within the next 6 months. What argues against this?
As noted, the senior gold producers are notorious for over-paying for acquisitions to replenish their production pipeline. This is often because they choose to make their acquisitions at the top of the market.
If we
are in the early stages of the next long/major bull market for gold mining (and gold), then it may end up being another 2 – 3 years before one of the Seniors pulls the trigger here.
