CENTAMIN said today it was critical of how Endeavour Mining had attempted to open talks on a merger proposal, but it rejected the proposal principally because it lacked a premium.
On December 3, Endeavour made public a proposal for an all-share merger with Centamin equal to a 5% premium to the 30-day volume-weighted average price. This represented a 13.1% premium to Centamin’s share price as of its December 3 close – a proposed offer of some £1.48bn.
It added that it had first suggested the merger a year ago, and made a fresh proposal in November. The proposal failed to get off the ground because Endeavour did not want to sign a standstill agreement that would prevent it from taking the proposal directly to Centamin’s shareholders in the event management negotiations faltered.
Centamin said its rejection of Endeavour’s merger proposal boiled down to the fact the company would own 47% of the combined unit, but contribute 100% of the free cash flow and dividend distributions, based on historic performance.
“The board strongly believes that Endeavour’s proposal significantly increases financial and operating risk without any material benefits to our shareholders,” said Josef El-Raghy, chairman of Centamin in a statement. The company had paid out $500m to shareholders since 2014 whereas Endeavour had not yet approved a dividend policy.
The merger proposal failed to take into consideration Centamin’s cash and liquid assets as at September 30 of $289m and that it was debt free, the company said. In comparison, Endeavour had gross debt and financial obligations of $729m, said Centamin. It also had financial liabilities related to hedging and streaming obligations.
“Therefore, a significant portion of the cash flows derived from Endeavour’s assets will not accrue to shareholders,” it said, adding that Centamin “deserved a premium” given the quality of its asset base.
Other aspects of the merger Centamin criticised was the fact that its shareholders would swap their more liquid UK stock with less liquid Endeavour shares, which trade in Toronto.
Shareholders would also be exposed to deteriorating conditions in Burkina Faso where the Endeavour mine Houndé operation is situated. On November 12, Canadian miner, Semafo, suspended operations at its Boungou mine after convoy transporting employees was ambushed in a terrorist attack that cost 39 lives, as well as injuries to scores more.
In terms of the merger proposal submitted by Endeavour, there is a 28-day period of “put up or shut up” in terms of UK Takeover Panel regulations. Thereafter, Endeavour may take the matter to a formal hostile takeover attempt.
Endeavour has argued that Centamin would benefit from its multi-asset and geographic spread whereas Centamin is a single-asset company – it operates the Sukari mine in Egypt – which is not currently seen as optimal among investors. The gold market has been transformed in the last year amid a flurry of combinations including that of Barrick with Randgold and Newmont with Goldcorp.
“We believe that the Centamin’s shareholders are currently disadvantaged by the Sukari mine being managed within a single-asset portfolio, by the recent operational challenges and the ongoing leadership transition at Centamin,” said Sebastién de Montessus, CEO of Endeavour in a statement on Tuesday.
Centamin’s Sukari has run into grade problems as Centamin attempted to access new areas of the mine, both open pit and underground.
The company reported in October third quarter production of 98,045 ounces from Sukari taking year-to-date output to 332,141 oz. Whilst this was in line with its plans, analysts were sceptical that restated full-year output of 490,000 oz would be achieved as it would need a 60% quarter-on-quarter lift.
The combined company would be the 12th largest gold producer with annual production of some 1.2 million oz, said Goldman Sachs in a report. Endeavour said it remained open to discuss the optimal structure for a potential merger which could including listing locations for the combined entity, said the bank.
