The expert panel at this week’s WA Mining Club lunch in Perth were suitably cautious about the mining sector’s fortunes for 2019 after being overly optimistic at the start of last year.
But there was general consensus that “nil-premium mergers” would become more prevalent as a way for producers to add scale and attract investors.
Using Doray Minerals’ (ASX: DRM) proposed merger with Silver Lake Resources (ASX: SLR) as an example of companies chasing scale through a nil-premium deal, PCF Capital managing director Liam Twigger said smaller companies would continue to struggle to attract investor support.
History has shown the traditional M&A model of paying a premium for a target was more likely than not to destroy shareholder value, and nil-premium deals were likely to become more common.
“There has been a big shift from active funds into passive funds … and that has had a massive impact on the capacity to raise money,” Mr Twigger told the WAMC audience.
“In years gone past, the way you do a deal is you have to offer a 30 to 40 per cent premium. But in the last 10 years about 90 per cent of those deals destroyed value.
“So, to come together at the same prices with nil premium shows a level of understanding and maturity that says ‘let the market decide whether we are due for a re-rating’.
“Because it is harder to get the discretionary money and you are faced with the problem of how you bump yourself up to become relevant, it’s a case of maybe coming together and doing that to become more relevant.
“I think we are going to see a lot more M&A and it’s a great endorsement of those who have the confidence and the maturity to say ‘I don’t have to get a 30 or 40 per cent premium, let the market decide’, because that type of deal has historically destroyed shareholder value rather than created it.”
Under the terms of the proposed merger, Doray shareholders will own 37.77 per cent of the enlarged Silver Lake, which will be a leading growth-focused mid-tier ASX gold stock with a pro-forma production profile of 240,000 ounces of gold and gold equivalents.
Hartleys chairman Ian Parker said consolidation in the mining sector was welcomed and agreed it would become more common.
“It’s a hugely positive thing. What companies are finding is that bigger is better, particularly in the gold sector,” Mr Parker said.
“What you are seeing is a lot of companies aren’t getting the recognition that they should from investors, because of the advent of the passive funds we’re talking about that are only interested in scale.
“A company producing 50,000 to 60,000 ounces of gold, even if they’re making good money, is going to struggle to attract that sharemarket support.
“So, what I believe is we are going to see is much more of this merger and acquisition, and hats off to Doray and Silver Lake for getting this non-hostile merger going.
“We’re not here to promote stocks, but it is just a fact that it (the merged company) will be a 240,000 ounce producer which should attract the attention of these major investors.
“People are going to see that and wonder if it’s worth battling on for the next five years running my own company, or are we better off to get serious about it and get some scale.”
Doray managing director Leigh Junk said he was in almost constant communication with his company’s shareholders and had received overwhelmingly positive feedback on the proposed merger and the reasoning behind it.