On May 31, Yamana Gold (AUY) and Gold Fields Ltd. (GFI) announced a merger which would create the globe’s fourth largest gold miner, explains Benj Gallander, editor of Contra the Heard.
Yamana owners will receive 0.60 Gold Fields shares under the terms of the deal. The transaction is expected to close in the back half of 2022, is subject to shareholder approval by both companies, and must receive regulatory clearance.
This purchase is a “friendly” merger, which means it has the support of both boards and has voting agreements in place. The acquisition contains standard language around non-solicitation and comes with significant termination fees. All of these features make it more likely that this deal will close as envisioned.
If the acquisition is completed, Yamana owners will control 39 percent of the joint enterprise. The headquarters will remain in South Africa, and it will retain its listings in New York and Johannesburg. This means Canadians will see our stock convert into a USD denominated security.
What exactly does each business bring to the table? From Gold Field’s perspective, Yamana will add growth and long-term upside. From Yamana’s viewpoint, GFI will contribute a greater portion of the current production profile.
Moreover, as a combined entity the corporation will support a mine life of approximately 25 years, be a true gold mining heavy weight, and have a well diversified portfolio across four continents.
Management also anticipates annual pre-tax cost savings of approximately USD$40 million, although they are not announcing the write-downs that will almost assuredly occur. Investors may wish to look through the press release or presentation for more detail; slide 11 summarizes the relative strengths well.
The market punished GFI after this deal was announced; it initially lost nearly a quarter of its market cap, which effectively wiped out its year-to-date gains. Many analyst reports and market commentators attributed this to the rather generous multiple GFI was paying. Though there is a case for this argument, we think it is a weak one and that owning 61 percent of the combined organization is more than fair given Yamana’s superior growth prospects.
There is the possibility that if GFI’s share price remains battered, institutional investors could demand the company sweeten the terms of the deal to win their support. They have pushed back at Yamana's management before. In 2015 they voted down the company's executive compensation plan after governance watchdog Glass Lewis cited excessive pay and one-off rewards.
Though Yamana contritely promised to do better at the time, they are now prepared to fork over a package worth almost $48 million to executive chair Peter Marrone under the terms of the merger. One has to wonder if his motivation to sell the company aligns with shareholder interests. Certainly, we question it, and think this his personal windfall ought to be dramatically reduced.
Our plan is to hold as neither Yamana's nor Gold Fields's price today reflects the value tied up by the new company’s growth profile. One can hardly overstate how impressive the Yamana prospects are and how robust its production, development, and exploration pipeline is over the next decade. This is why we bought it for both portfolios.
In my view, this M&A confirms to us that we were buying valuable mining assets with good growth prospects and rich cashflows. In time, we suspect the market will better appreciate these features and reward shareholders. In our model portfolio, we continue to recommend shares of Yamana; we also believe that Gold Fields is worthy of consideration.
