Eldorado president and CEO George Burns gestures during a news conference in Athens in 2017.Petros Giannakouris/The Associated Press
Eldorado Gold Corp. ELD-T chief executive officer George Burns spent the past seven months working on a $3.8-billion bid for Foran Mining Corp. FOM-T.
Somewhere along the way, Mr. Burns persuaded the Foran board of directors to accept an offer with no takeover premium for a company that owns a massive Saskatchewan copper project.
That qualified as a major achievement, as Eldorado’s peers have routinely paid double-digit premiums to snap up smaller rivals. In a conference call with analysts early Monday, Mr. Burns took justified pride in spelling out terms of the transaction. Eldorado is paying 0.1128 of its shares and one cent in cash for each Foran share.
Investors were less than impressed.
Eldorado Gold and Foran Mining shares tumble after announcing $3.8-billion acquisition
Eldorado shares, already down 10 per cent late last week as bullion prices tanked, dropped another 8.5 per cent on Monday after the company unveiled the Foran acquisition. Analysts spent part of the conference call asking Mr. Burns why he surprised shareholders by tarnishing Eldorado’s gold production with Foran’s output of copper and zinc.
On Monday, Foran’s share price dropped by 5.2 per cent.
The bruising reception for Eldorado’s offer hides a basic truth: Takeovers done without massive premiums tend to work out well for the buyers.
The logic is sound. Merging companies without enriching the seller’s shareholders at the expense of the buyer’s balance sheet creates a new entity that is bigger, more diversified and financially stronger.
Former Barrick Gold Corp. CEO Mark Bristow championed zero-premium deals after using the structure to sell his former company, Randgold Resources Ltd., to Toronto-based Barrick back in 2018.
Mr. Bristow’s flaw was sticking stubbornly to this approach and missing out on attractive acquisitions that commanded above-market price tags. Last September, he exited Barrick after significantly underperforming peers.
In December, the owners of Teck Resources Ltd. approved a zero-premium merger with Anglo American PLC, after an initially lukewarm reception.
Other gold miners that successfully executed no premium takeovers in recent years include Endeavour Mining Corp. and SSR Mining Inc. These companies saw their stock prices surge as bullion prices soared.
When Eldorado came calling, Foran’s board accepted a zero-premium bid for their company in part because they anticipate investors will put a higher valuation on their base metal mines when they are part of a gold producer. On Bay Street, creating wealth this way is known as re-rating a stock.
At Vancouver-based Eldorado, Mr. Burns and his board are betting Foran’s McIlvenna Bay copper project in central Saskatchewan can provide a shareholder-friendly balance to its existing gold properties in Greece and Turkey.
In September, the federal government made getting McIlvenna Bay into production one of the early priorities for its Major Projects Office. The mine is expected to start producing later this year.
If shareholders approve the Foran takeover, Eldorado projects 15-per-cent of its 2027 revenue will come from copper, and 37-per-cent of its assets will be in Canada.
Eldorado set its sights on Foran after the country’s largest gold producer – Agnico Eagle Mines Ltd. – boosted its stake in the company two years ago by taking part in a $315-million stock sale. Fairfax Financial Holdings Ltd. also increased its holding in Foran as part of the financing.
Agnico and Fairfax’s investment in Foran, and potential to swap the stakes for Eldorado shares, should serve as a seal of approval for the takeover when shareholders in both companies vote on the transaction later this year.
Eldorado’s Mr. Burns had the misfortune of announcing a major transaction on the heels of a rout in gold mining stocks last Friday.
In a report on Monday, arbitrage analyst Tyler Tebbs at Tebbs Capital said the gold miner also faced a familiar response from precious metal fund managers: With plenty of gold stocks to choose from, these institutional investors simply dump a stock and move to another if they don’t like a deal.
Negative initial reviews for Eldorado’s takeover are nothing new. Numerous mining companies saw their stock price drop on news of an acquisition.
However, buying a business without paying a premium price is always going to be a sound approach to building a global company. Mr. Burns has reason to be proud of the terms of the Foran takeover.