Last rush for large-scale rationalisation of gold mining
By STEPHEN BARTHOLOMEUSZ
There is much that is compelling about Delta Gold's $530million bid for Acacia Resources.
The two companies, of broadly comparable size (Acacia is slightly larger), represent perhaps the last obvious and relatively straightforward opportunity for large-scale rationalisation of the local gold sector.
Given the backdrop of a gold price that is depressed and likely to remain so for the foreseeable future, the savings, scale benefits and improvement in sharemarket liquidity and investor appeal of turning two $500million companies into a $1billion company are worth pursuing.
The merging of Delta and Acacia has, moreover, particularly powerful logic. The companies are both exposed to what is effectively the same ore body. Delta has a 40 per cent stake in the Granny Smith mine near Laverton in Western Australia. Acacia owns probably the most profitable gold mine in the country, the Sunrise Dam project, which shares a boundary with the Granny Smith mine.
Both companies have extensive exploration interests in the surrounding area, regarded as the most prospective in the country. Both have offices in Kalgoorlie and Perth.
The savings from putting the two companies together, rationalising their offices and administration and mining the Sunrise ore body as a single project are estimated to be at least $20million a year, or close to $150million of net present value.
Given the logic of a merger, it isn't at all surprising that the companies have talked extensively about merging over a period of about 18 months. The only surprise, perhaps, is that they couldn't agree a deal.
There are always two preconditions for a successful merger, or indeed most deals.
The first is that the concept has to be right and the benefits obvious to the participants and their stakeholders. A Delta/Acacia merger gets a big tick on that score.
The second, however, is where deals generally founder. The distribution of value between the parties and their shareholders must be demonstrably fair - both sides have to be certain they are getting a good deal.
The talks between Delta and Acacia broke down on that issue.
While the talks were seriously alive, Acacia shares, which had traded at a modest but meaningful nominal premium to Delta's, started to slip. Delta's, meanwhile, buoyed by the initial enthusiasm about its Wallaby find in WA, started firming.
Delta already traded on a higher premium to its net present value than Acacia, partly because of the high regard in which its managing director, Terry Burgess, is held by the market and partly because it offers retail investors an attractive fully franked yield.
The inversion in the share price relationship and Acacia's belief that Delta's shares were overvalued by the market and its own undervalued, was destined to put pressure on a merger which was predicated on the relativities being set by the market prices of the day.
Value is a core issue in a merger. Another is its distribution. One of the novel issues for the merger - and now a central issue in the hostile takeover to which Delta has resorted after ultimately being rebuffed by Acacia - is that there is no certainty about the distribution of the synergies that could be generated by mining the Sunrise ore body as a single project.
That is because Delta has a majority partner in Granny Smith, the big US gold miner, Placer Dome. Placer has a 60 per cent interest in the project and is the operator. The synergies aren't available unless and until a deal is struck with Placer.
Strengthening Placer's position even further, unlike Acacia, Delta has no operational experience of its own and its ability to acquire Acacia's experience is dependent on its ability to convince Acacia's key management to move to its Sydney head office.
Delta said yesterday it had reached an agreement with Placer to ``negotiate in good faith to maximise the benefits on an equitable basis for both parties,' in the event its takeover succeeds.
There is no agreement on how the spoils of a successful takeover will be shared. Clearly Placer would be in a powerful position to extract something better than its 60 per cent of the Granny Smith side of the project would deliver - it holds the key to unlocking the synergies. Without its agreement, they don't exist.
In other words, given that the bid is an all-paper offer, Acacia shareholders won't know precisely the value of the exchange until after they have sold their shares and effectively halved their exposure to the Sunrise Dam mine. They won't know until it is too late to be of any use to them whether value has been diverted to Placer.
That is a problem for the Delta offer. Given the modest premium it is extending - about 13 per cent at the pre-bid price levels - the merits of the bid relate overwhelmingly to the level of synergies attributable to Acacia shareholders in the merged group.
Yet it can't quantify the level of Acacia shareholder benefit. It is asking them to put their trust in Placer's generosity or poor negotiating skills. That issue, and the usefulness of Delta's Part A as a guide to Acacia shareholders' understanding of the currency they are being offered, may complicate the process and increase the level of hostility.
Delta would no doubt hope that there is a sufficient overlap of institutional shareholders within the two companies, and the institutions are sufficiently taken by the broad appeal of the merger concept, that the reality that it is making a hostile scrip bid for Acacia doesn't affect the outcome.
With Acacia's register having completely turned over within the past year or so, and probably about half its shareholders having bought in at prices of less than $2 a share, the combination of Acacia's strong rejection of the terms yesterday and taxation issues will increase the focus on the issue of value and how it is distributed.
The norm for takeovers in the gold sector involves surprisingly large premiums for control - the weighted average premium paid in gold company takeovers over the past three years, both in Australia and overseas, is more than 65 per cent above the pre-bid price.
The discrepancy between normal takeover pricing and the Delta offer creates plenty of scope for any counter-bidder.
Normandy and Newcrest, which are partners with Acacia in the Wandoo project in WA, are obvious interested parties. So too is Placer which, despite having its fair share of problems offshore, could see the bid as creating at least the prospect of eventual full ownership of the Sunrise deposit.
e-mail:
bartho@theage.fairfax.com.au
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