Doray, Silver Lake bounce back as market takes a closer look at gold merger

Doray, Silver Lake bounce back as market takes a closer look at gold merger

Doray Minerals (ASX: DRM) shares jumped almost 5% on Friday to bounce back after a rough market welcome to news on Wednesday it had agreed to merge with Silver Lake Resources (ASX: SLR).

At its 32.5¢ week-end close, Doray was back in touch with levels of 36¢ before the surprise merger was announced on Wednesday. (Doray’s 30-day volume-weighted average price pre-merger news was 35.2¢.)

The surprising element was that news of this proposed union – via a scheme of arrangement, with Doray to be folded into Silver Lake – had not leaked to the market, much to the credit of both companies’ management teams.

The flipside is that the market doesn’t like surprises and often takes a while to digest what has been dished up.

So it proved on Wednesday when the merger was announced.

Doray shareholders will receive 0.6772 Silver Lakes shares for every unit they hold, and combined will speak for 37.3% of an enlarged group with pro-forma production this year of around 240,000 ounces of gold and gold equivalents.

Based on Friday’s close, the merged entity will have a market capitalisation of about $400 million and become a genuine mid-tier ASX-listed gold producer.

On face value, this deal is exactly what both sets of shareholders had been asking for.

And there is no shortage of consolidation in the West Australian gold sector. Just look at the moves, for example, by Ramelius Resources (ASX: RMS) and Spitfire Materials (ASX: SPI).  

Doray, successfully transformed by managing director Leigh Junk and his team over the past two years, needs another asset or two to complement its small but high-grade Deflector mine in the Murchison.

Deflector last year produced 64,600oz of gold and 3400t of copper. This year’s target is 80,000-85,000oz and 2250-2750t of copper at all-in sustaining costs of $1050-1150/oz. Deflector’s mineral resource is 800,000oz and 16,000t copper, at a grade of 8.7 grams per tonne gold.

Over at Silver Lake’s Mount Monger operation, 50km south of Kalgoorlie, production last year was 158,000oz. This year’s target from Mount Monger, which comprises three underground and one open-pit mine, is 140,000-150,000oz at AISC of $1350-1390/oz. Mount Monger has a resource of 3.72 million ounces at 3.7g/t.

It is easy to dismiss this deal as a cobble-together of a small high-grade operation (Deflector) with a larger but higher-cost operation (Mount Monger).

But that ignores some key facts:

  • The Aussie dollar gold price remains at $1600/oz or better, so both Deflector and Mount Monger are enjoying strong operating cashflows.

  • Both operations have significant in-mine and near-mine exploration potential to boost the respective mineral resources and, possibly, the head grade.

  • Silver Lake is debt free and (at 30 September) had $111 million of cash and equivalents. In other words, Silver Lake is cashed up and able to apply its balance sheet to driving organic growth at both Mount Monger and Deflector.

  • And let’s not forget that with a pro-forma market capitalisation of around $400 million, an annual profitable production profile of about 240,000oz in a Tier 1 jurisdiction like Western Australia, and run by management with strong operational expertise, the enlarged Silver Lake should be a leading candidate for a market re-rating.

Schemes take a long time to work through – four months in this case – and it is clear both Doray and Silver Lake have a lot of educating to do to convince all shareholders of the merits.

Friday’s bounce by Doray to 32.5¢ and Silver Lake’s 1% recovery to 49¢ (to value Doray at 33.2¢ under the scheme) suggests the initial surprise and perhaps disbelief in the marketplace are being replaced with a more pragmatic approach to the latest consolidation play in Western Australia’s gold sector.

Disclaimer: Doray is being advised by PCF Capital, Bellanhouse and Cannings Purple. Silver Lake’s advisers are Sternship Advisers, RBC Capital Markets and Hopgood Ganim.

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