The Pluses And Minuses Of The Equinox-Leagold Merger

Dec. 20, 2019 2:18 AM ETEquinox Gold Corp. (EQX), LMCNF, EQX:CA38 Comments

Summary

  • Equinox Gold and Leagold Mining announced a merger.
  • Leagold's shareholders will receive 0.331 Equinox shares for each Leagold share.
  • The new company should produce 700,000 toz gold in 2020 and around 1 million toz gold in 2022.
  • If the growth plan is fulfilled, the share price of the new company should grow significantly.

This week, Equinox Gold (NYSE:EQX) and Leagold Mining (OTCQX:LMCNF) announced a merger. According to the news release, the newly created company will keep the name Equinox Gold and it will be 55%-owned by the current Equinox shareholders and 45%-owned by the current Leagold shareholders. The Leagold shareholders will receive 0.331 Equinox shares per 1 share of Leagold. At the time of the announcement, this equaled approximately $2.05, which was in line with the pre-announcement closing price of $2.04. Although the new company will keep the Equinox name and Equinox shareholders will hold the majority of shares, there was no premium offered for Leagold shareholders. This is why the companies call the transaction "a true merger of equals". It seems that the deal will come through, as it has already secured the support of managements and key shareholders of both companies.

ChartData by YCharts

Whether it is a merger or a zero-premium acquisition, the markets welcomed the deal positively. As can be seen in the chart above, since the December 16 announcement, the gold price (represented by the SPDR Gold Trust ETF (GLD)), as well as the VanEck Vectors Junior Gold Miners ETF (GDXJ) and the VanEck Vectors Gold Miners ETF (GDX) experienced only negligible growth. However, shares of Leagold and Equinox rose by more than 9%.

The question is what positives and what negatives this deal will bring to shareholders of both companies. There are several obvious positives:

  • The size of the company will increase. The new Equinox will have 6 operating mines (Mesquite, Los Filos, Aurizona, Pilar, RDM, Fazenda) and several advanced-stage development projects (Castle Mountain, Los Filos expansion, Santa Luz). The company seems to be poised to become one of the bigger mid-tier gold producers, with an aim to produce around 700,000 toz gold in 2020 and to approach the 1 million toz per year production level by 2022.
  • As the company will be bigger in terms of asset value and production volumes, its market capitalization should also increase. Right now, Equinox shares trade at $6.81. After the merger is completed, there should be over 214 million shares outstanding, which means that the new company should have a market capitalization of around $1.5 billion. It should be more than enough for Equinox to be included in the VanEck Vectors Gold Miners ETF. Companies of similar size in terms of annual gold production, like Yamana Gold (AUY), B2Gold (BTG), IAMGOLD (IAG) or Centerra Gold (CAGDF), have weights in the 1-2% range. If Equinox should command a similar weight, GDX will have to purchase its shares worth $150-250 million, causing a significant upwards pressure on the share price.
  • As the company will be bigger, its debt capacity will also be higher. Moreover, the creditors should be willing to provide money at some better terms, as the new company will be less risky. It is possible to see the first effects in the form of a new $130 million convertible debt, a $100 million term loan and a $400 million revolver credit facility that were announced together with the transaction.
  • The risks should be more diversified. Both companies are developing their key assets, Equinox the Castle Mountain mine and Leagold its Los Filos mine. In the case that one of the projects encounters some trouble, the new, bigger company should be able to deal with it more easily and the negative impacts on the share price should be more limited.

However, there is also a negative:

  • The new company will be developing several projects at once. Although that can be seen as a positive, as it diversifies some of the risks, it can be seen also as a negative, because there is the risk that the management simply won't be able to focus on everything, and something will be neglected.

As shown above, the positives of the transaction seem to outweigh the negatives. What is important, both the companies maintain relatively low valuation, given their production profiles and near-term growth potential. Also, the new company looks quite cheap, which provides a buying opportunity. It is expected that by 2022, the annual production of new Equinox should be around 1 million toz gold. Although the expected AISC wasn't provided, given the current AISC levels and the AISC projected for Castle Mountain and expanded Los Filos, it is possible to expect that in the $850-900 range. To be more conservative, let's assume that Equinox will reach production of only 900,000 toz gold per year at an AISC of $950. At a gold price of $1,400/toz, which is well below the current gold price of approximately $1,480/toz, the company should be able to generate free cash flow around $400 million. At a price-to-free cash flow ratio of 10, which may turn out to be very conservative given that other companies with an annual gold production around 1 million toz gold tend to have this value well above 10 (Yamana - 40.56, B2Gold - 15.15, Centerra - 21.25, Kirkland Lake (KL) - 21.03), the market capitalization of Equinox should be around $4 billion, which is more than 150% above the current pro forma market capitalization of the combined entity.

Conclusion

The Leagold-Equinox merger is quite surprising. However, it makes sense. The new company will be bigger, stronger, well-financed and having excellent growth prospects. The merging companies also expect some G&A cost savings of approximately $10 million per year. Right now, it seems like the new Equinox has a pro forma market capitalization of around $1.5 billion. However, it should grow significantly if the plan to grow gold production to 1 million toz per year is fulfilled successfully.

This article was written by

Peter Arendas profile picture
7.06K Followers
An in-depth analysis of the royalty and streaming industry

I am an associate professor at the University of Economics in Bratislava, Department of Banking and International Finance. My dissertation was focused on commodity markets and my habilitation was focused on the calendar anomalies. I have more than 15 years of investing experience. My investments mostly focus on small- and mid-cap companies in the resource sector. Since May 2019, I have been preparing regular monthly reports focused on the precious metals royalty & streaming industry. Based on positive feedbacks and numerous inquiries, I decided to launch a Marketplace Service named "Royalty & Streaming Corner", which provides an in-depth analysis of this exciting market segment, as well as investment ideas from the mining industry.


Disclosure: I am/we are long LMCNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments (38)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.