GOLD Fields has increased its stake in Gold Road Resources to 10% after buying 74.8 million shares in the gold development firm for 86 Australian cents per share – equal to a 27% premium to Gold Road’s closing price on May 19.
The South African-headquartered firm already owns 50% of Gold Road’s Gruyere, a promising gold prospect in Western Australia. Buying a stake in the project’s founding company hints at Gold Fields’ interest in securing the project. Gold Road has suggested Gruyere represents the first substantial discovery of a new gold province.
However, there’s a standstill agreement that in the absence of a third party takeover bid for Gold Road, Gold Fields is prohibited from increasing its stake further.
Gold Fields announced last year that it had entered into a 50/50 joint venture in Gruyere with Gold Road after agreeing to pay the Australian firm A$350m ($268m).
RBC Capital Markets gold analyst Paul Hissey was quoted in an article published by the West Australian that Gold Fields equity acquisition was a vote of confidence in its partner.
“We believe this investment by Gold Fields is a vote of confidence in Gold Road’s operations, with Gold Fields seeing the exploration potential in current programs throughout the Yamarna belt,” said Hissey.
“We believe Gold Road presents as an attractive investment, with the company in the passenger seat with a global major developing it’s asset, an exciting exploration program in a relatively under explored region and valuation upside, with the stock still trading at a 34% discount to our target price of 90c,” he said.
However, Goldman Sachs was concerned the pressure the transaction – albeit relatively small – would apply to Gold Fields’ balance sheet and consequently its ability to maintain the dividend. “On our current estimates, the company’s free cash flow yield as of FY17 is -9%. Post this transaction, taking out the US$48mn, we estimate it would be -10.5%; this could present downside risk to the dividend case,” it said.
“While the acquisition amount is small ($48m) compared to the company’s cash position S$527m), we highlight that it is a further burden on FCF generation and increases the leverage slightly,” it added.
The Gruyere project is situated in Australia’s Yamarna Belt, roughly 200km east of Laverton in Western Australia. It contains 3.5 million ounces of gold in reserves (6.2 million oz in resources) and is expected to yield production of about 260,000 oz/year for 13 years at an all-in sustaining cost (AISC) of A$945/oz ($725/oz) and all-in costs (AIC) of A$1,103/oz ($847/oz) based on a feasibility study completed in October.
Gruyere will cost an estimated A$507m ($389m) to build with first production forecast to be at the end of 2018 or early 2019.
The transaction also includes a 1.5% royalty on Gold Fields’ share of production after total mine production exceeds two million oz with an approximate value of A$15m ($11.5m).
In addition to contributions to construction cash calls, Gold Fields will also contribute A$50m ($38m) in the form of conditional assumed liability for up to a 10% overrun on the initial development of the project, and a further A$75m ($57m) in funding support by way of a Gold Fields guarantee to the joint venture company.