SHARES in Gold Fields closed a fifth lower in the US yesterday suggesting the South African firm’s CEO Chris Griffith has some difficult discussions ahead with shareholders who appear to have been blind-sided by its $6.7bn all-share bid for Yamana Gold.
The view of some investors is they had no sight this merger and acquisition activity was coming. Employed as an excellent operator, Griffith has swung for the fences with deal discussions beginning barely six months after taking his office seat.
One concern, for instance, is the MARA (Minera Alumbrera) expansion – the Argentina operation that offers the most growth which Griffith said Gold Fields was seeking in the Yamana deal (Yamana owns 56.25% of MARA). The project accounts for roughly 70% of Yamana’s reserve base, but at a capital cost of about $2.4bn is expected to absorb a fair portion of Yamana’s future cash flow.
Argentina is also a difficult jurisdiction: complicated to extract money, strike hit and with double digit inflation, it demonstrates many of the failed state characteristics that investors often impute to South Africa, Gold Fields’ home base.
Given this kind of geographic exposure, the question is why Yamana trades at a better multiple to Gold Fields – which is undoubtedly a better company?
The premium may have to do with Yamana’s home base jurisdiction, and highlights the challenge South African companies encounter when using lower rated paper compared to international peers, especially in M&A.
No-one appears to doubt the logic of Gold Fields deal; it’s just the value in the near-term. Yamana was trading at an EV/EBITDA (the value of the company less debt, amortisation and depreciation against its profitability) of 6.5x compared to 5.5x for Gold Fields. RMB Morgan Stanley said the transaction was dilutive and would be so at the share earnings level for the next two years.
In the meantime, the slide in Gold Fields’ share price – its offer was a fixed share ratio of one Yamana to 0.6 Gold Fields – suggests that a rival bid for Yamana may emerge.
According to BMO Capital Markets potential bidders could include Agnico Eagle which owns 50% of Yamana’s Canadian Malartic mine. “Kinross might also benefit from Yamana’s low-cost, cash-flowing assets, although it is expected to remain disciplined on M&A and focused on its long-term organic growth,” said Ray Raj, the bank’s analyst.
“The senior gold miners are trading at 1.5x NAV, a significant premium to Yamana; therefore, in an environment where there have been few major discoveries, we believe that it is highly likely that a competing bid will emerge as existing Americas-focused operators and highly-rated Australian miners seek to acquire assets in North America,” said Berenberg Bank analysts Jonathan Guy, Richard Hatch et al.