Middle Ground In The Middle Kingdom: North Americans Show Australia The Way In M&A.
By Michael Quinn* / www.minesite.com
What the very smooth Jake Klein does next isn’t yet known, but it’s unlikely he’ll be short of either a dollar or job offers in the resources sector after overseeing the SinoGold business so successfully. And while there are some who question whether the company rolled over a little too easily in the Eldorado transaction, shareholders of companies like Avoca Resources and Dioro Exploration might be wondering whether their directors have learnt a thing or two about the M&A caper.
A case can be made that the two corporate actions reinforce the perception that North Americans know how to transact deals – Canadian gold juniors Lake Shore Gold and West Timmins Mining also announced a $C319 million scrip merger last week – while the Australian sector struggles to find middle ground. And fail to find it at shareholder expense!
Avoca’s initial bid for Dioro was on the cheap side and was always going to struggle to get the nod from the target company’s board. Dioro managing director Rhod Grivas followed the script and travelled to la-la land with KPMG’s Duncan Calder and Jason Hughes, with the magic numbers they subsequently came up with being so far removed from reality that the trio looked certifiable. End result of all the claims and counter claims was Avoca ending up with 45 per cent of Dioro and a ménage a-trio in play after Ramelius rocked up on the doorstep at the eleventh hour with a glint in its eye.
All the while shareholders of these two main protagonists (to date) have no doubt been thrilled paying the invoices flowing in from the likes of KPMG, Steinepreis Paganin, Pendulum, and National Bank Financial in the Dioro corner, and RBC and Cochrane Lishman in the Avoca corner. As they say, there’s got to be a better way.
In the SinoGold-Eldorado case, directors have become best friends and shareholders are being told it’s a great deal for both parties. Of course they would say that wouldn’t they? Here, it’s the analysts that are querying the deal, with a number on the SinoGold conference call intimating Eldorado was really the company that stood to profit.
Credit Suisse was one that was a tad sceptical. "Although we believe that Eldorado’s 21.3 per cent premium offered is fair, we feel that SinoGold has perhaps rolled over a little too easily, and illustrate that in the context of a 12-year history of M&A in the gold mining sector, a 21.3 per cent premium is in fact quite small,” the investment bank’s analyst team said. “Management seems content with what seems a rather convenient exit option, and we speculate whether the last six to nine months has demonstrated that perhaps doing business in China is a little more challenging than management had anticipated.”
Two points can be made. Firstly, if doing business in China is all about relationships – as it is always said to be – then it would seem a change of ownership is always going to be a particularly difficult course to negotiate. Klein has been at the forefront of the Sino business since the 1990s and if he was ready for change, then selling the company to the only other established Western-domiciled China gold producer of note is perhaps the only option that makes sense.
Secondly, when GoldFields was seeking to offload its SinoGold stake a few months ago, Eldorado was self-evidently the most interested. There are not a lot of companies interested in becoming gold miners in China. The sale also makes sense in the context of Klein’s claim that the company was at a new juncture in its corporate life, and was seeking another asset outside of China as part of its ambition to be a top quartile, intermediate gold producer.
Such companies have production of about double what SinoGold was heading towards by 2012, and they occupy what Klein calls the “sweet spot” of the gold sector in terms of being accorded high multiples by strong investor interest. In raw numbers the combination of Eldorado and SinoGold sees the new Eldorado much closer to the sought after one-million-ounce-per-annum production profile, while Eldorado is apparently already something of a poster child for gold growth stocks in the North Amercan market.
“I think (the future for Eldorado) will be very positive,” Klein said. “They have sustained this very positive rating and hopefully the North American market will apply that same rating to SinoGold’s assets which we’ve been trying to aspire to. I think this is a case of sharing that premium for the benefit of both sets of shareholders.”
And warm and fuzzy as it is, therein lies a key to transacting business deals for non-omnipotent companies - “sharing”. It’s not rocket surgery. However, it is true the “sharing” argument is not exactly quantifiable. Which doesn’t necessarily make it weaker given numbers aren’t necessarily the be all and end all.
While many of the analysts on the SinoGold call were evidently unable to make sense of the deal on numbers involved, Peter Harris of JF Capital Partners was one exception: “Forget metrics, this is a good deal on a DCF basis, Jake, well done,” Harris said. Which, as with the example of Grivas, Calder and Hughes, shows you can always find a number or two to suit your argument.
Undeniably the real stumbling block listed equity transactions face is usually the exit that has to be made by one of the management teams. In the case of SinoGold-Eldorado this seems a non-issue. Under Klein’s stewardship at SinoGold, the $1 shares issued in the late-2002 IPO had an implied value of $7.24 with the $A2.2 billion Eldorado deal.
Klein won’t be short of backers if he wants to have another go. When asked what he planned to do he told HighGrade that he “(hadn’t) really thought about it much yet”. Pressed further, he said he did expect to remain in the resources sector in a full-time capacity. Whether that ends up being an opportunity spied when SinoGold started looking for another project outside of China is yet to be known.
Asked about the new SinoGold strategy, Klein indicated the search was in the early stages when Eldorado approached, but that Asia was of interest “given the potential to leverage our skill sets and approach to doing business in some of the countries in the region”. Meanwhile, from a macro perspective, Australia’s contribution to the intermediate global gold sector continues to look unlikely to grow anytime soon, with another contender set to disappear over the horizon. Dealmakers desperately needed.
*This article first appeared on Highgrade.net
SGX Price at posting:
$6.27 Sentiment: None Disclosure: Not Held
