Gold sector consolidation not slowing down

We’re living, it seems, in the age of M&A warfare.

After buying up a 19.9% stake in OreCorp (ASX:ORR) in November last year, Perseus Mining (ASX:PRU) lobbed an all-out takeover bid in January 2024 to rival that of Vancouver-based Silvercorp (TSX:SVM).

Silvercorp’s offer, which OreCorp’s directors backed in August 2023, would convert each OreCorp share into 0.0967 Silvercorp shares and deliver $0.19 per share to OreCorp investors. Based on Silvercorp’s share price of US$2.31 earlier this week, OreCorp shareholders would receive the equivalent of $0.528 per share.

Perseus, meanwhile, has made an all-cash offer to buy the rest of OreCore’s shares at $0.55 each.

“Clearly a cash offer is superior,” Perseus CEO Jeff Quartermaine said in an interview with The Australian Financial Review.

“It is a very stark choice, do they want to take cash in hand and have certainty or do they want to roll the dice on a company that is less well known in this market and doesn’t have the credentials that we have for developing projects in Africa.”

Central to the bidding war is OreCorp’s Nyanzaga Gold Project in Tanzania, which hosts a probable ore reserve measuring 40.08 million tonnes at 2.02 grams per tonne (g/t) gold for 2.6 million contained ounces. According to a Definitive Feasibility Study completed in 2022, a 4-million-tonnes-per-year open pit and underground mining operation has been proposed, with a 10.7-year life and pay-back period of 3.7 years.

Perseus currently owns three gold mines in Africa — Edikan in Ghana, and Sissingué, and Yaouré in Côte d’Ivoire — but has been shopping around for potential add-ons after violence in Sudan forced it to put a pin in its Meyas Sand Gold Project.

However, in response to Perseus’s bid, OreCorp says the conditional proposal is not considered to be a superior one, and that “the board has not changed their existing unanimous recommendation in favour of the current offer by Silvercorp.”

It’s the second time in less than a year that directors of an ASX-listed gold target have thrown their support behind what appears to be a lesser offer. In H1 2023, St Barbara (ASX:SBM) shrugged off Silver Lake’s (ASX:SLR) bid for the Gwalia Gold Mine near Leonora in preference for what was considered a more reliable offer from Genesis Minerals (ASX:GMD).

Indeed, 2023 was a monster of a year for M&A. Newmont (ASX:NEM) acquired Newcrest Mining for $26.2 billion to create the world’s largest gold miner. BHP (ASX:BHP) forked out $9.5 billion to buy Oz Minerals. Livent and Allkem embarked on an $8.6 billion merger to create Arcadium Lithium (ASX:LTM), and Andrew “Twiggy” Forrest’s investment vehicle Wyloo spent $760 million to acquire Mincor Resources (ASX:MCR).

In its Australian Public M&A Report 2023, law firm Herbert Smith Freehills noted the continued strength from the belter year that was 2022, and that the activity slowdown at the end of FY22 and start of FY23 was short-lived.

“There were 56 deals announced in FY23 (compared to 65 in FY22 and 57 in FY21). Total deal value for FY23 was the second highest in the past 5 years, at an aggregate $75.6 billion (compared to $123.7 billion in FY22 and $44.4 billion in FY21),” the report said.

“The data shows that the press suggesting a soft public M&A market is not supported, with the number of deals in line with the 5-year average and the value being 41% greater than the average

“The data shows that the press suggesting a soft public M&A market is not supported, with the number of deals in line with the 5-year average and the value being 41% greater than the average.”

There is, of course, a heavy smattering of factors that inform any transaction. While they can vary from momentum-driving ESG concerns to the impact of inflation, or from regulatory involvement to shady equity tactics, some are purely geological.

In an interview with Reuters, Harmony Gold (JSE:HAR) CEO Peter Steenkamp said a certain amount of corporate consolidation, particularly within the gold sector, is unavoidable.

“I think it’s going to be inevitable that there will be some sort of consolidation, because exploration has been lacking for such a long time and for people to replace assets they will have to look at what their neighbours have and what the opportunities will be,” Steenkamp said in March last year.

It’s true that, in Australia particularly, the gold discoveries that had once established Down Under as a global hotspot are failing to materialise at the same scale. Major producers have been scratching their heads, looking for viable reserves to get their multi-million-ounce processing operations up to capacity, and decided in many cases that acquisitions are cheaper, easier, and much quicker than exploration.

“The rate of discoveries has dropped off despite the increase in absolute dollar terms in exploration,” Genesis Minerals CEO Raleigh Finlayson told The Australian Financial Review in August.

“The other thing is where those ounces have been discovered is obviously deeper from an underground sense of higher strip ratio from an open pit sense, and that makes it higher cost to convert into production.”

Exploration data from the Australian Bureau of Statistics shows that although exploration spending for the September 2023 quarter had risen 5.2% from the year before, the amount of drilling carried out had fallen 4.1% to 2,813.4km. Of that amount, 1,991.7km of drilling was carried out at existing deposits, while 821.7km was undertaken at new deposits.

While the September quarter was heralded by the Association of Mining and Exploration Companies as a record one, the apparent increase in drilling costs falls in line with concerns about how, exactly, depleting reserves can be replaced in a way that isn’t prohibitively expensive.

A headache for producers though it might be, it presents some key opportunities for juniors.

Astral Resources (ASX:AAR), which owns the Mandilla and Feysville gold projects and 100% of the gold rights at the Carnilya Hill Project — all of which sit within the prolific Goldfields district surrounding Kalgoorlie — is taking notice.

“If you look widely within the gold sector at the moment, there is a lot of discussion about the majors and even the mid-tiers struggling to replace ounces, so they do look to acquire them rather than explore for them,” Managing Director Marc Ducler told in June last year.

“You’ve got Newmont taking over Newcrest. I think that’s just about scale, they just want to be the biggest and the best by a long way. Then you’ve got Westgold taking over — or trying to take over — Musgrave. You’ve had Ramelius take over Apollo and Breaker, and they’re all looking to buy those ounces.

“I think that also is an opportunity for us, because people that would potentially look to buy our ounces are buying them to feed into existing processing infrastructure, so they don’t have the capital costs associated with building something new. They can literally grab those ounces and start making money, which potentially presents us with a good opportunity to monetise it as well.”

Euroz Hartleys Managing Director Tim Bunney agrees, saying in an interview with The West Australian last month that miners “just can’t get the organic production out of their own asset base at the moment.”

“And as some of the small miners become capital constrained, I think equity values will become appealing to large companies with their balance sheets,” he added.

Whether or not Perseus’s tilt for OreCorp falls into the ounce-grab category is probably a matter of conjecture. The Perth-based company produced 128,773 ounces of gold from its Edikan, Sissingué and Yaouré mines in the December quarter, at an all-in sustaining cost (AISC) of US$1,023 per ounce.

For the 2023 calendar year, Perseus produced 528,486 ounces at an AISC of US$984 per ounce.

Perhaps it’s the reverse situation; that — having enjoyed a strong year of production and sales in 2023, and having witnessed the direction the global gold sector seems to be heading now — Perseus has acted preemptively.

In its 2023 Annual report, published at the end of August, the company made mention of its strategy to pursue both organic and inorganic growth strategies in Africa and elsewhere.

“We keep a watching brief across many projects and with approximately US$800 million in existing cash reserves and undrawn debt capacity at our disposal along with expectations of continued strong cash flows in the years ahead, we are well positioned to capitalise on any opportunities that, upon evaluation, demonstrate the potential to generate added value for our shareholders, in line with our corporate objective,” Perseus said.

In any case, consolidation in the resources sector — particularly gold — has shown no signs yet of letting up. If the trend continues as it has in the post-COVID hubris of the last couple of years, we can expect 2024 to be another big one for both dealmakers and investors.

Write to Oliver Gray at 

Images: OreCorp & Perseus
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Written By Oliver Gray
Originally from Perth, Oliver has a keen interest long-form journalism. He has written for a number of publications and was most recently Contributing Editor of The Market Herald’s opinion section, Art of the Essay.