Northern Star, Saracen create $11.5bn Australian gold giant

The merger of the companies, which already jointly run Australia’s giant Super Pit (pictured), may mark a revival of major deal-making in the gold sector. (Image by Andrew Parnell |Flickr Commons)

Australia’s Northern Star Resources (ASX: NST) is buying Saracen Mineral Holdings (ASX: SAR) in a deal that will create a A$16 billion ($11.5bn) gold giant — the world’s eighth-largest gold miner by market value.

The agreed A$5.76 billion ($4.14bn) merger comes amid record high gold prices —  above $2,000 per ounce for the first time in August — brought on by investors rushing to safe-haven assets in response to fears triggered by the coronavirus pandemic.

The combined company, with mines in Australia and Alaska, will produce 2 million ounces of gold a year from fiscal 2027. It is also expected to deliver as much as A$2 billion in operational savings, the miners said in the statement.

The combined company, with mines in Australia and Alaska, will produce 2 million ounces of gold a year from fiscal 2027

Northern Star, Australia’s second-largest gold miner, will own 64% of the combined entity, with Saracen holding the remaining 36% stake. A shareholder meeting to formally approve the proposal will be held in January 2021, the companies said.

Northern Star and Saracen already jointly run Australia’s iconic Super Pit, which has an estimated reserve of 7.3 million ounces and has produced on average 660,000 ounces a year over the last five years.

“Logical and strategic” merger

The combined Northern Star-Saracen, which aims to became the world’s seventh gold miner by output, will focus on three production centres.

One of them is Kalgoorlie, based around the super pit in central Australia. The second is Yandal, which will consolidate both companies’ small mines and mills in the nearby desert region of Western Australia.

The third centre, around Northern Star’s Pogo mine in Alaska, is where the companies see major growth opportunities. Pogo, which the Perth-based miner bought in 2018 for $260 million, is expected to produce 180,000-220,000 ounces of gold in the 12 months to June 30 next year. The goal is for the mine to churn out 300,000 ounces a year by 2023.

BMO precious metals and minerals analyst Brian Quast estimates that the combined miner would have over 19 Moz of reserves and 49 Moz of resources.

Management is currently predicting between A$1.5 and A$2 billion of synergies in the next 10 years as operations management is rationalized.

“This is one of the most logical and strategic [mergers and acquisitions] transactions the mining industry has seen,” Saracen managing director Raleigh Finlayson said. “The savings, the synergies and the growth opportunities it will generate make the transaction extremely compelling.”

Northern Star, Saracen create $11.5bn Australian gold giant
Source: Northern Star and Saracen presentation.

“Between both portfolios we’ve got so many growth options. We’re not planning to divest anything and in fact we’re growing our production,” Northern Star executive chairman, Bill Beament, added on an investor call. “We’ve got plenty of feed to keep our expanded processing plants going for decades to come.”

BMO’s Quast said one of the key aspects of the mergers was that the new senior gold producer has room to grow. “If current plans are maintained, our estimates would have the merged company producing 2.1 Moz in 2025,” he wrote in a note to investors.

“While a larger company may garner slightly higher multiples than the two smaller companies could have, a senior producer with significant organic growth would stand out in the space.”

A single, unified company may also be able to optimize the Superpit more efficiently than the current JV arrangement, Quast added.

The boards of both companies have recommended the transaction, which is expected to be completed in February.

Northern Star’s chief executive officer, Stuart Tonkin, will remain in his post, with Finlayson to act as managing director for 12-to-18 months before taking on a corporate development role. Beament will remain in his position until July, when he’ll become non-executive chairman.