West African gold specialists Amara Mining (LON:AMA) and Perseus Mining (ASX:PRU) have agreed to combine in a merger of not-quite equals, which will see Amara shareholders speaking for 35.1% of the enlarged company on a pro-forma basis.
Amara’s shares jumped just over 17% to 12p on the news, some way short of the notional 16.3p offer price, while Perseus shares, as is often the way for bidding companies, weakened by over 10% to A$0.37 in overnight trade on the ASX.
The thinking behind the deal is clear, on both sides.
For its part, Perseus is well established in the ranks of the mid-tier gold producers and is looking for growth in a market which is unforgiving of second-rate assets.
As one of the largest undeveloped gold projects in Africa with more than seven million ounces to its name, Amara’s Yaoure project gives Perseus a serious growth profile that’s almost unmatched amongst its mid-tier peers.
For its part, Amara has always recognised that it was going to need a bit more muscle on side if it was ever going to get Yaoure built.
The company has just upgraded its pre-feasibility numbers, and these came in attractively enough. The current model shows Yaoure producing average annual production of 248,000 ounces over the first five years of its life, and an average of 203,000 ounces over its full 15 year life.
Head grades, at 1.62 grams per tonne, aren’t too bad either.
But there was always the small matter of finding the up-front capital cost of US$334 million that would be required to get Yaoure built.
Sure, at all-in sustaining costs of US$664 per ounce, the project looked viable enough. But equity markets have had a bellyful of gold development stories at the moment and that sort of funding package was always going to look like a tall order, however much refinement Amara was able to achieve.
With existing production of over 200,000 ounces per year already to its name, Perseus can approach Yaoure from a slightly different standpoint. For one thing, development is not make or break for it, so it can afford to take its time and get the funding package right.
For another, it actually has cashflow and profits and can arguably afford to stump up a much larger portion of the development costs from its own resources.
The timing of the deal, just days after the latest pre-feasibility numbers for Yaoure were announced, is unlikely to be coincidence either.
Perseus was clearly seeking comfort as to the returns on offer, and in a strengthening gold market, clearly liked the 38% IRR and US$555 mln NPV that is on offer, at an 8% discount and assuming a US$1,200 gold price.
A few short weeks ago, that gold price would have looked aggressive and unrealistic. Now, with the gold price at US$1,229, it looks if not conservative, at least reasonable.
Of course, there are still various approvals to be sought and attained, including the approval of Amara’s own shareholders.
But this offer is recommended, and key shareholders have already indicated that they will support the deal.
On completion of the deal, Amara’s chief executive John McGloin will join the Perseus board. It’s not stated what will happen to Amara’s highly-rated finance director Pete Gardner.