It’s been a busy 12 months or so for the gold mining sector.
Consolidation is afoot in the sector, with two massive tie-ups leading in turn to other, smaller deals.
First, Canada’s Barrick Gold agreed late last year to pay $6bn (£4.6bn) for London-listed Randgold Resources, whose founder and chief executive, Mark Bristow, went on to run the enlarged business.
Then, in January, US-based Newmont Mining, the second-largest player in the sector, announced in January that it would pay $10bn (£7.7bn) for Goldcorp, based in Canada, the world number four.
Since then, there have been other deals, with Kirkland Lake, another Canadian gold miner, last week agreeing to buy its smaller rival Detour Gold for $3bn (£2.3bn).
Then, on Monday this week, Chinese company Zijin Mining agreed to buy Continental Gold, a Canadian-listed company with interests in Colombia, for $1bn (£0.8bn).
Newmont was involved in this deal, too, since it owned a 19.9% stake in Continental that it agreed to sell to the Chinese company.
Further consolidation is expected.
The gold mining sector is immensely fragmented around the world and fewer gold discoveries are taking place because those deposits that have not already been found are in hard to reach places – which means production costs are rising.
That means it makes sense for larger companies to gobble up smaller ones – it is often cheaper for a gold miner to acquire new reserves by buying a rival rather than by investing in exploration – and particularly if their production methods are more effective.
There are numerous mid-sized gold miners whose production costs are higher than those of their larger brethren.
More to the point, shareholders of such companies have been agitating to mergers to take place, with the activist investor John Paulson putting together a coalition of shareholders in gold miners, the Investors Gold Council, to agitate for change.
That is the backdrop to Tuesday’s attempted takeover bid for Centamin, one of the UK’s best-known remaining listed gold mining companies, by Canada’s Endeavour Mining.
The Toronto-listed company is prepared to pay £1.25bn (£1bn), all in shares, for Egyptian specialist Centamin – whose only operating mine, the Sukari mine 560 miles to the southeast of Cairo, is reckoned to be one of the world’s biggest 10 gold deposits.
The offer was pitched at a 13% premium to Centamin’s closing price on Tuesday evening and, accordingly, shares of Centamin have shot up by just shy of 15%.
Under the terms of the deal, shareholders in Endeavour – which owns four mines in Côte d’Ivoire and Burkina Faso – would own approximately 52.9% of the enlarged company, with Centamin shareholders the remaining 47.1%.
Michael Beckett, the Endeavour chairman, said: “We firmly believe that the proposed combination between Endeavour and Centamin provides a compelling value creation opportunity for both sets of shareholders which is superior to what can be achieved by each company on a standalone basis.”
He said that “despite repeated good faith attempts to engage with Centamin”, the London-listed company had refused to “entertain any discussions”.
As a result, he added, Endeavour had decided to make public its proposals.
Endeavour also noted that the enlarged company would, in 2019, have produced 1.2 million ounces of gold at a cost of $875 (£673) per ounce, compared with Tuesday’s price of around $1479 (£1137) an ounce, making it one of the industry’s most efficient producers.
Sukari, some 16 miles from the Red Sea coast, produces 490,000 ounces a year.
The timing is no coincidence.
Centamin has issued three profits warnings this year related to difficulties at the mine and, before the offer, its shares had lost a quarter of their value since the end of August.
Moreover, the company has only just parted company with Andrew Pardy, its chief executive of the last four years.
Nor is the decision to alight on Centamin a coincidence.
Endeavour’s biggest shareholder with a 29.9% stake is La Mancha, a mining investment firm owned by Naguib Sawiris, the Egyptian billionaire whose family founded the engineering and construction giant Orascom.
Mr Sawiris, the seventh-richest man in Africa, has made no secret of his desire to invest in African gold mining opportunities.
Mr Sawiris said: “We believe in the strategic rationale for this proposal and are fully supportive. We have long argued that there is scope for further consolidation within the industry.
“Moreover, we can add significant value in Egypt, which is opening-up its mining sector through a new, more supportive mining code, and increase the potential for further expansion in the country.”
But Centamin, which has itself been exploring in Côte d’Ivoire and Burkina Faso in the recent past, wasted no time in rebuffing the offer.
It told shareholders: “The board believes…the terms of the proposal provide comparatively greater benefit to Endeavour’s shareholders, do not adequately reflect the contribution that Centamin would make to the merged entity and that Centamin is better positioned to deliver shareholder returns than the combined entity. As a result the board has unanimously rejected the proposal.”
Few analysts, however, expect that to be the end of the matter.
John Meyer, head of research at SP Angel, a corporate finance firm that specialises in covering mining stocks, told clients: “The offer for Centamin may prove to be an opening salvo in a lengthy struggle to consolidate African gold production.”
Hunter Hillcoat, mining analyst at the stockbroker and investment bank Investec, said the enlarged company, with a market value of $3.8bn (£2.9bn), would be one of the world’s top 15 gold miners and therefore would attract a wider shareholder following.
He added: “We regard the Centamin share price as undervalued currently, given the production issues faced during this year…as such, the Endeavour offer seems somewhat opportunistic.
“[But] in our view, a tie-up has merits, with the greater production diversity relieving the ongoing pressure on Sukari to perform quarter-in, quarter-out, particularly from the underground operations.”
Tim Huff and Peter Mallin-Jones, of broker Peel Hunt, also argued that a deal would make sense.
They told clients: “We believe the…merger proposal for Centamin would provide the management and operational direction Centamin has lacked for the past two years. The combination should advance both the Centamin and Endeavour business plans and benefit both sets of shareholders.
“Importantly, the timing is also right. We believe Centamin has needed direction for some time. Perhaps most important to us, the Endeavour operational team should be much better equipped to run Sukari on a sustainable basis than Centamin has delivered over the past two years.”
So today’s exchanges feel like the beginning of what could be a long-running battle.
Endeavour’s management is well-respected in the industry and is clearly seen in some quarters as being able to raise the performance of Sukari – although Mr Hillcoat said today he thought “it may be underestimating the complexity of Sukari somewhat”.
Its main challenge will be convincing Centamin’s investors that it is paying a fair price.
There was grumbling today that the offer was “cheeky and low ball”.
Centamin’s challenge, meanwhile, will be to convince investors it is better off standing on its own two feet.
Failing that, its best interests will lie in trying to get a counter-offer from a rival bidder, or, failing that, to persuade Endeavour to raise its offer and, ideally, pony up some cash.
Its shareholders, including many thousands of private investors for whom it has been a long-standing favourite, will be watching avidly.