MarketOpen Radar: Silver Lake and Red 5 to loom large over LeonoraFebruary 12, 2024
Gold producers Silver Lake Resources (ASX:SLR) and Red 5 (ASX:RED) are on collision course to become a 445,000-ounce a year mid-tier producer in coveted ground in Canada and Western Australia, although with a muted reaction from investors.
How have Silver Lake and Red 5 blipped the radar?
A merger between Silver Lake and Red 5 was foreshadowed in September last year when Silver Lake raided a $100 million stake for 11% of Red 5 through Petra Capital, widely assumed to be a pre-emptive strike against Raleigh Finlayson and Genesis Minerals’ ambitions to create a consolidated gold miner around Leonora.
Silver Lake was earlier rebuked twice by St Barbara, opting instead for sale of its flagship Gwalia mine at what looked like a significant discount to Genesis.
The deal was not without hard feelings, with some from within St Barbara wanting a more competitive bidding process but leadership – citing the lack of a non-binding indicative offer and late demands for due diligence – went toward Genesis, and the majority agreed.
“St Barbara had no time for time-wasters and tyre-kickers,” a company spokesman said.
Red 5 was the presumptive next target for Genesis, but the 11% stake was past the point where it could block a takeover, and Silver Lake looks to have its target for a $2.2 billion agreed as a “merger among equals.”
But in place of the customary price bump for a takeover target, both company’s share prices have slipped in the wake of the announcement.
What are the advantages?
The advantages are economy of scale, to put it simply. A merger would leave the former duo with $235 million in net cash and $143 million in listed investments, de-risking their collective reserves and opening production from 4 million ounces of group ore reserves and 12.4 million ounces in mineral resources hosted in world-class jurisdictions and established mining hubs.
Both have productive assets, but Silver Lake has the cash and Red 5 the long-life asset.
The resources sector also appears ripe for a period of consolidation, and a merger between the similar-sized entities could turn them both from presumed prey for the majors into a united and cash-rich predator.
“This transaction represents a highly complementary combination of assets and balance sheets for the mutual benefit of both Silver Lake and Red 5 shareholders,” Silver Lake CEO and presumptive CEO and managing director of the new entity Luke Tonkin said.
“Mergers work when each company brings attributes that the other company does not possess, which is undoubtedly the case here.
“The increased scale, diversification and financial strength of the new company that will be formed via this transaction will be primed for continued strong cashflow generation and further growth.”
And then there is a strong gold price of about US$2023 ($3101), with little current incentive for traders to push capital toward battery metal commodities.
What are the complications?
What is not apparent is if the merged assets would be able to offer any real reduction of production costs, offering only the prospect of more bars and no production streamline from the consolidated assets.
And there are no true equals, and Red 5 holders will be left with 51.7% of the merged entity, and Silver Lake’s holding the remainder, offering a potential point of contention for Silver Lake holders paying off Red 5’s considerable debt.
Red 5 holders could also believe they brought the best asset and perhaps holding a lingering grudge over a share raid that blocked any potential deal with Genesis.
The Silver Lake board and Red 5’s both unanimously recommended the deal, but their tick-offs remain contingent on the absence of a better offer.
“Market seems to think it is a worse deal for SLR and it probably is, it has been a M&A target, but this offer works out around 113 cents, not a great price,” Marcus Today Senior Market Analyst Henry Jennings was quoted by XM.com.
Then there is Sugar Zone, Silver Lake’s Canadian asset where production was shuttered to get firmer grip on geology amid a series of inefficiencies, wildfires, and an aged and unreliable mining fleet after producing a scant 38,976 ounces for 2023.
Silver Lake has made a $35 million commitment to spend on exploration and infrastructure upgrades for a restart, launching 93,000 metres of drilling, but has yet to release results.
What are the assets
Silver Lake’s Deflector mine previously acquired in a Doray Minerals takeover has proven the best performer of the four, slated for 120,000-130,000oz this year at $1500-1650/oz on top of a SLR Mount Monger mainstay predicted to produce 90,000-100,000oz at $2300-2500/oz.
But the tentpole appears to be Red 5’s King of the Hills gold mine, the largest and holding the most meat on the mine-life bone, predicted for 195,000-215,000oz at sustaining costs of $1850-2100/oz over the same frame after a record crushing and milling performance in the December 2023 quarter.
Who’s the next takeover target?
Genesis has already dealt with Kin Mining, set to receive $15 million in cash and 21.9 million shares in Genesis for part of its Cardinia flagship, and Kin Executive Chair Rowan Johnston did not seem opposed to future dealings, holding over 932,000oz and large amounts of Leonora territory still unexplored by modern method.
“This puts us in a unique position in the junior WA gold sector, with the ability to unlock the value of our existing assets, aggressively target new discoveries and participate in future consolidation,” Johnston said at the time.
But this deal, despite the market’s first reaction, appears to make sense for both parties, and the new entity, whether it be Lake 5 or Red Silver, appears set to come in flush with cash and a market cap exceeding Genesis as a period of consolidation begins in earnest.
Read the previous MarketOpen Radar: OreCorp offers for Nyanzaga nuggets
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