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Rare synergies in Western Australian Super Pit mine merger bode well for growth

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The Kalgoorlie Super Pit in Western Australia with the Kalgoorlie township in view.
Source: Northern Star Resources Ltd.

Northern Star Resources Ltd.'s proposed A$16 billion merger with Saracen Mineral Holdings Ltd. will be a rare example of actual synergies in mining M&A where co-located assets and a reputation for aggressive exploration and innovation are poised to deliver material cost advantages over peers, experts said.

S&P Global Market Intelligence analysis below shows the deal is one of the biggest in the past five years and the market backed the move, with Northern Star and Saracen shares rising 10.6% and 9.5%, respectively, Oct. 6 when the deal was announced.

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Saracen Managing Director Raleigh Finlayson told an Oct. 6 analyst call that the companies aim to create a top-10 global gold miner, operating exclusively in Tier 1 jurisdictions as a long-life producer with over 19 million ounces in reserves and 49 Moz in resources.

Finlayson said he is "absolutely comfortable" that the zero-premium deal is the right thing for shareholders, citing recent JPMorgan analysis showing that such deals have "significantly outperformed all the deals that were done under premium."

The merged entity would have A$200 million of combined equity ownership among board and management, Northern Star Executive Chairman Bill Beament said on the call. "In fact, this team on an ownership basis is equivalent of being a top-10 shareholder of the combined entity," he said.

UBS Mining Equity Analyst Daniel Morgan asked for more detail regarding specific synergies anticipated in procurement, processing, trucking, haulage, optimization and the tax impact, but company executives did not elaborate much in response.

In late 2019, Northern Star agreed to acquire a 50% interest in the Kalgoorlie Super Pit mine for US$800 million, shortly after Saracen agreed to acquire a 50% stake for US$750 million.

Morgan calculated that the synergy estimates represent about 5% of the companies' combined all-in sustaining cost position, as shown below, to be gained from both cost efficiencies and higher revenue from recoveries, he told S&P Global Market Intelligence.

The companies have been processing ore from the Mount Charlotte mine through the mill at the Kalgoorlie joint venture operation, which has been returning an average 83% gold recovery rate, Morgan noted.

"If you put it through [Saracen's] Carosue Dam mill and you get 93% recovery, there's 10% more gold in your pocket that would otherwise be wasted by going to a tailings dam, and that alone is worth A$15 million per annum, if you can do that," Morgan said.

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Market Intelligence Senior Research Analyst Gregory Rodwell said the combined entity, temporarily dubbed "MergeCo," would be well-positioned compared to peers if the anticipated synergies are realized.

"For calendar year 2021 and using consensus broker forecasts for input costs and inflation, we forecast that the MergeCo will have an all-in sustaining cost of US$879/oz, before any synergies are realized," Rodwell said in an email interview. "That is equivalent to A$1,345/oz using forecast 2021 calendar year inflation."

The estimate is similar to Market Intelligence forecasts for the peer group. Of the ASX-listed peers shown below, Rodwell said only Regis Resources Ltd., SSR Mining Inc. and Kirkland Lake Gold Ltd. have lower all-in sustaining costs, and only Kirkland Lake would have a similar production profile in terms of scale.

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Nevada comparisons

Morgan said that, unlike most mining M&A deals where talked-up synergies are often "ethereal and don't really exist," MergeCo's collection of co-located assets is "not the norm in mining."

The closest parallel is the Nevada joint venture enacted in 2019 by Barrick Gold Corp. and Newmont Corp., where both have lots of processing facilities and mines and adjacent tenement boundaries, Morgan said.

Similar to the Carosue Dam example, "ore was mined then trucked past a mill that in an ideal world would process it but didn't happen due to separate ownership," he said.

Removing the joint venture structure should lower costs from the outset, the assets being in the same area should lead to genuine value accretion and MergeCo will not be relying on general and admin savings, which could be material too, Bernstein Global Metals and Mining Analyst Danielle Chigumira told Market Intelligence.

Chigumira said the size of the portfolios of Barrick and Newmont, the previous Super Pit owners, and the fact that both have been involved in significant corporate actions in the past two years likely means it has not received a huge amount of management attention recently, opening up potential for fundamental upside.

Morgan said the Jundee mine, which Northern Star bought from Newmont for US$91 million in 2014 with a couple of years of mine life left, is a prime example of its track record of resurrecting tired assets, noting that the market now considers the project to be worth up to A$3 billion with a mine life exceeding 10 years.

"They did that because these companies are more productive than the majors, which they have to be because the ore bodies are tougher," Morgan said. "They are generally higher grade, have higher strip ratios or have some geological issue that means it's not as easy to mine."

"They're also more aggressive and will commit more capital to exploration [than the majors], will do it earlier and with a faster decision-making process," he added.