sezer66/iStock via Getty Images
It's been a busy year for M&A in the gold sector (GLD), with more than ten deals, a sharp increase from what was already a busy year in 2020. One of the most recent deals was the acquisition of Golden Star Resources (NYSE:GSS). On a reserve and NPV (5%) based on the current mine plan, the $470 million price tag looks expensive. However, factoring in the total resource base, this is one of the cheapest acquisitions we've seen in years, suggesting that investors may need to temper their expectations regarding valuations for Tier-3 producers in takeover scenarios. This update looks at how the deal stacks up to prior acquisitions, and why this was a win for both parties.
(Source: Company Presentation)
Just over four months ago, I highlighted Golden Star as a Speculative Buy at $2.45, and the stock was acquired two months later for a more than 40% premium. This acquisition by Chifeng Lifong Gold Mining ("Chifeng") at a meaningful premium is not surprising, with Chinese suitors expressing interest in all jurisdictions and more willing to go into less attractive jurisdictions to acquire. This is evidenced by the acquisition of Nevsun and Continental Gold by Zijin Mining (Serbia, Eritrea, Colombia), the purchase of Cardinal by Shandong Gold (Ghana), and now the recent purchase of Golden Star in Ghana. Let's take a closer look at the transaction below:
(Source: Company News Release)
As noted above, Golden Star received an all-cash offer to be acquired for $470 million by Chifeng, a deal that valued Golden Star at ~1.40x NPV (5%) at a $1,750/oz gold price. On a per-ounce basis (reserves), the deal valued Golden Star at ~$431/oz based on its most recent reserve base of ~1.09 million ounces. However, on a measured & indicated, and total resource basis (measured, indicated, and inferred), Chifeng paid a mere ~$133/oz and ~$40/oz, respectively.
This is one of the lowest prices paid for ounces in any jurisdiction for a producer, well below the ~$49/oz paid for TMac Resources and the nearly $70/oz paid for Semafo Gold during the COVID-19 Crash, both brilliant acquisitions. So, while Golden Star is certainly inferior to both companies, the fact that this deal was done at a $1,800/oz gold price for a much lower price per ounce certainly shows that Chifeng paid the right price for this single-asset producer. Golden Star's inferiority is because TMac Resources had a much higher-grade resource in a safer jurisdiction (Nunavut). Meanwhile, Semafo shared a similar jurisdictional profile (Burkina Faso), but it had two mines (Mana and Boungou) vs. Golden Star's one mine, Wassa.
(Source: Golden Star Resources Website)
Past Takeovers
The chart below looks at past takeovers, and as we can see, we have seen a steady increase in the price paid per ounce over the past several years for gold producers. This makes sense given the trend higher in the gold price since 2016, with a range of ~$30/oz in 2016 (St. Andrews Goldfields) to more than $300/oz last year, with Fortuna paying up massively for Roxgold (OTCQX:ROGFF).
Newcrest Mining's (OTCPK:NCMGF) acquisition of Pretium also came in at a high price of nearly $300/oz, but the price paid wasn't overly surprising given that this is a rare high-grade Tier-1 jurisdiction asset with what looks to be a 15+ year-mine life ahead after the recent regional discovery at Golden Marmot. However, as we can see, Golden Star is one of the lowest-price acquisitions we've seen by a massive margin, especially considering the gold price sitting just shy of record highs.
(Source: Company Filings, Author's Chart)
If we look at acquisitions of solely African companies, there have been ten small to large size acquisitions, with the producers fetching a much higher valuation than the explorers/developers, which is to be expected. Among the nine takeovers highlighted in the chart, the median price paid has come in at ~$67/oz, with acquisition prices ranging from ~$11/oz to more than $350/oz in the Roxgold acquisition. However, the lowest price acquisition of True Gold occurred at a gold price below $1,300/oz, which explains why the price paid was so low. The above chart excludes Randgolas, a merger of equals with Barrick (GOLD).
Looking at the Golden Star acquisition, though, we can see that this was a significant deviation from the norm. This is because the median price paid for $150/oz, and excluding what I would argue to be a generous price paid for Roxgold, the average price paid came in at ~$95/oz for producers. However, this was at an average gold price of less than $1,700/oz. In the case of the Golden Star takeover, the gold price was the highest of all instances, yet the price paid was the lowest among all producers.
(Source: Company Filings, Author's Chart)
This can be partially explained by the fact that 70% of the ounces in Golden Star's inventory were inferred ounces (~8.18 million ounces / ~11.7 million ounces). However, this is still a very low valuation, confirming that Chifeng got a very solid deal here. Meanwhile, Chifeng also got a solid deal on a P/NPV (5%) basis, which is a more suitable way to measure the deal. This is because while it paid ~1.4x P/NPV (5%) for Wassa based on its current mine plan, it scooped up over $600 million in upside in net asset value from the Southern Extension PEA.
(Source: Golden Star Resources Presentation)
As shown below, Wassa's current mine life was estimated at six years based on the Q1 2021 update, with average gold production of ~177,000 ounces at all-in sustaining costs of $881/oz. This translated to an After-Tax NPV (5%) of roughly $340 million at a $1,750/oz gold price. However, this was based on only the reserve base (~1.09 million ounces), while Golden Star had another 10 million ounces of resources in its inventory (8.18 million inferred ounces at 3.44 grams per tonne gold, ~2.4 million M&I ounces at 3.76 grams per tonne gold).
Based on this significant resource base, with the majority below the current reserve base, there was a significant upside to the mine life here. In fact, the Southern Extension PEA estimated 11 years of production with an average production profile of 294,000 ounces. Notably, Golden Star would finally be able to take advantage of its untapped processing capacity (~2.7 million tonnes per annum), with a portion of this capacity sitting idle based on the current mine plan. Therefore, while this deal looks quite expensive on a P/NPV basis on strictly the current mine plan at Wassa (reserves only), the price paid on a net asset value basis looks very reasonable with a total NPV (5%) at Wassa (Southern Extension + current mine life) of closer to $1.1 billion.
(Source: Golden Star Resources News Release)
If we assume a more conservative NPV (5%) of ~$950 million to factor in inflationary pressures, which could affect costs and the cut-off grade, and stricter conversion rates on inferred ounces, Chifeng paid approximately ~0.50x NPV (5%). This is a massive discount to the ~1.4x NPV (5%) that Newcrest paid for Pretium in British Columbia, and an enormous discount to the ~1.1x NPV (5%) paid for Roxgold. This discount makes sense given that Golden Star is a higher-cost single-asset producer. Still, the disparity between the Roxgold and Golden Star is quite significant, suggesting that Chifeng did a much better job acquiring than Fortuna, even if it did use its inflated currency.
So, why did Golden Star agree to the deal at all?
While Chifeng certainly got a great price for Golden Star, Golden Star was somewhat un-investable relative to its peers due to being a producer with average costs in a Tier-3 jurisdiction with only one asset. So, given the opportunity to get a significant premium, I think management made the right move here for its shareholders, especially given the difficult environment with many stronger producers continuing to make new 52-week lows. So, I see this as a win-win for both parties and believe it makes sense to take profits on Golden Star and move the capital into another undervalued name in the gold space.
It's also worth noting that investors holding single-asset miners in Tier-3 jurisdictions should temper their expectations for takeover premiums, with the Roxgold premium appearing to be an aberration from the norm. In fact, I would even think 0.70x P/NAV is likely generous for single-asset Tier-3 producers. In terms of undervalued producers at current levels to find a new home for Golden Star capital, I continue to like names like Agnico Eagle Mines (AEM) and Alamos Gold (AGI), which trade at deep discounts to their historical NAV multiples.
