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Endeavour, Centamin to explore potential merger

The Sukari gold mine, 700 km from Cairo, is the only operating gold mine in Egypt. (Image courtesy of Centamin.)

Canada’s Endeavour Mining (TSX:EDV) and Egypt-focused miner Centamin (LON:CEY) (TSX:CEE) have agreed to assess the merits of a merger that would create a strong mid-tier gold company with a market value of almost $4 billion and annual output of more than 1.2 million ounces.

The announcement follows weekend talks in Perth, Australia, between Endeavour’s chief executive, Sébastien de Montessus, and Centamin’s chairman, Josef El-Raghy.

Merger would create a mid-tier gold miner with a market value of almost $4bn and annual production of more than 1.2 million ounces.

The meeting was arranged after Centamin rejected early this month Endeavour’s $1.9 billion (£1.5 billion) all-stock takeover bid, saying it did not offer enough value to its shareholders.

It also noted a business combination would expose the company to the deteriorating security situation in Burkina Faso, as almost half of Endeavour’s gold resources are located in the west African country.

At least 37 civilians were killed and more than 60 wounded when gunmen ambushed a convoy transporting workers of Canadian gold miner Semafo (TSX: SMF) in eastern Burkina Faso last month.

The Toronto-listed miner, which is ultimately seeking to gain control of Centamin’s Sukari gold mine in Egypt, said a reciprocal due diligence exercise would be a “critical precursor” to determining whether a deal could be agreed.

“The objective…would be to allow both companies to further understand each other’s assets,” Endeavour said in the statement.

Sukari gold mine is a 500,000-ounce-a-year operation and one of the world’s top ten deposits of the yellow metal. However, the company has struggled with a series of operational issues at the mine, which have weighed on the asset’s performance and on Centamin’s share price.

The operation, which kick off production in January 2010 and is Egypt’s largest gold mine, comprises a large open pit and an underground portion. Last year, the company worked on operational improvements on both sections, but they took longer than planned to materialize, which affected output.

Tough year

Centamin began 2019 with some key board changes, including the move of Josef El-Raghy from executive chairman to chairman, 16 years after becoming managing director. He has remained linked to the company while it searches for a successor.

In the months to follow, the company struggled to boost production at Sukari, its only operating mine, and the disappointments ended with the departure of Centamin’s chief executive, Andrew Pardey, announced in October.

Like El-Raghy, Pardey agreed to stay at the post for a year, while Centamin looks for a new boss.

Montessus said he was “disappointed” with Centamin’s refusal to discuss a business combination at a time when investors were pushing for consolidation in the gold sector.

A potential agreement would be just one more of the many mergers and acquisitions that have swept the gold sector this year

“We believe that the Centamin’s shareholders are currently disadvantaged by the Sukari mine being managed within a single-asset portfolio, by the recent operational challenges and the ongoing leadership transition at Centamin,” he said.

A potential agreement would be just one more of the many mergers and acquisitions that have swept the gold sector, with pending and completed deals worth $33 billion so far this year.

The frenzy, kicked off by the highly publicized multi-billion mergers of Barrick – Randgold and Newmont – Goldcorp, has picked up speed in the past few days. China’s state-backed Zijin Mining offering $1bn for Canada’s Continental Gold in early December and Kirkland Lake Gold launching a $3.7bn offer for Detour Gold.

Under English takeover rules, Endeavour has until the end of December to make a firm bid. Given the time that has elapsed since it went public with its offer, it has asked the Takeover Panel for more time to work on the new bid. 

“Centamin has however not yet done this and there can be no certainty that they will,” Endeavour added. It also said it was prepared, subject to agreement on due diligence, not to make a formal offer unless it was recommended by Centamin’s board.

“The ball is firmly back in Centamin’s court,” analysts at Berenberg said in a note to investors. “We look for an announcement from Centamin either agreeing to or rejecting the extension to the put up or shut up terms.”