Gold bars stacked at the United States Mint in West Point, N.Y., in 2014. Gold miners Alkane Resources and Toronto-based Mandalay Resources announced a takeover by Alkane on Monday. They hope investors will reward the combined firm with a 'rerate,' as gold prices rise on investor uncertainty.Mike Groll/The Canadian Press
Australia’s Alkane Resources Ltd. is buying Canada’s Mandalay Resources Corp. MND-T in a US$358-million transaction driven by the contention that bigger is better in the gold industry.
Perth-based Alkane and Toronto-based Mandalay hope that, by combining operations, investors will reward the combined company with a “rerate” – a higher stock-market multiple.
Despite record-high bullion prices, many gold miners continue to have difficulty attracting investors. That’s partly owing to the industry’s poor track record, but also the ease at which investors can gain exposure to gold through exchange-traded funds.
Mandalay investors will receive 7.875 Alkane shares for each share held, the companies said in a joint news release on Monday. The premium is only 2 per cent compared with Mandalay’s Friday closing price.
The transaction effectively amounts to a reverse takeover, as Alkane is the smaller company by market value, worth roughly US$301-million compared with Mandalay’s US$350-million.
The combined company should benefit from improved size and better access to capital markets, said Nic Earner, managing director and board member with Alkane, in a Monday conference call with analysts.
The deal will allow Alkane to join the VanEck Junior Gold Miners ETF (GDXJ) and could qualify it for inclusion in the ASX 300. Access to both would result in significant increased demand for the stock.
“We’re really putting rocket fuel under our ambitions,” Mr. Earner said.
Alkane operates the Tomingley gold mine in New South Wales. Mandalay owns the Costerfield gold-antimony operation in Australia and the Björkdal gold mine in Sweden. The three mines should result in the combined company producing 160,000 ounces of gold equivalent in 2025 and 180,000 ounces in 2026.
Ron Stewart, analyst with Red Cloud Securities Inc., said in an interview that while Mandalay is a solid producer with steady free cash flow, it doesn’t have significant growth ahead of it.
The acquisition by Alkane offers growth from the Tomingley operation, and potentially significantly more if its Boda-Kaiser project gets off the ground.
“Alkane itself was probably too small to develop it on their own. Maybe collectively the entity will have a better chance of moving that project forward,” Mr. Stewart said.
“Size really does matter in this business.”
He also pointed out that by being swooped up by an Australian company, Mandalay will benefit from increased buying from Australia’s pension fund sector. The country mandates its pensions put a certain amount of their holdings into its domestic resource sector, a mandate that does not exist in Canada.
“Domestically based producers are bought by Australian superannuation funds, which helps their market cap,” Mr. Stewart said.
Gold last week hit a new all-time high of around US$3,500 an ounce. Bullion tends to outperform during times of great uncertainty, and it has rocketed higher in recent months owing to the massive dislocation stemming from U.S. President Donald Trump’s global trade war.
Deal-making amid the gold-buying frenzy has also taken off. Last week, Barrick announced the sale of its stake in the giant Donlin Gold project for US$1-billion, and Ross Beaty-backed Lumina Gold Corp. agreed to a $581-million acquisition by China’s CMOC Group Ltd.
Alkane, in addition to its main listing in Australia, will have a secondary listing on the Toronto Stock Exchange. Depending on the liquidity of the stock, that may change over the next few years, management said in Monday’s conference call.
The deal will require a shareholder vote at both companies. At least two-thirds of votes cast in favour of the transaction are needed at Mandalay. A simple majority of votes cast at Alkane is required to approve the issuance of stock to pay for the acquisition.
After the deal closes, Mandalay shareholders will own 55 per cent of the combined company, and Alkane the rest.
Shares in both companies rose on Monday, with Alkane gaining 4 per cent in trading in Australia, and Mandalay closing up 5.3 per cent on the Toronto Stock Exchange.