Diggers and Dealers: Will Raleigh Finlayson's Genesis dance the devil's tango with St Barbara?

Raleigh Finlayson talked up the consolidation of the Leonora gold district in his Diggers and Dealers presentation
Economist Dambisa Moyo says the inflationary environment could spur another gold bull run
Capricorn’s Mark Clark says the emerging gold miner would favour development assets if it looks to grow through M&A

You may not remember Coupling, the British sitcom helmed by Steven Moffat about six male and female mates which, with its vulgarities and dry humour, put Friends and How I Met Your Mother to shame.

Its most memorable bit was the f… me fork, coined for the moment a potential partner is trapped with the phrase “do you fancy me?”

At that point, one character points out, it’s “fork me or fork off”.

We don’t know quite how desperate discussions between the parties has gotten, but it feels like a similar fork could come from Genesis Minerals (ASX:GMD) in its pursuit of a merger with St Barbara (ASX:SBM), where speculation about talks to consolidate Genesis’ 2.5Moz gold resources with St Barbara’s regionally dominant Gwalia operations near Leonora has consumed the gold space in recent weeks.

Genesis’ high profile boss Raleigh Finlayson’s speech on the opening day of Diggers and Dealers drew a score of interested observers, especially when the subject of due diligence between St Barbara and Genesis came up.

From one angle the Genesis-St Barbara talks are a logical step. Gwalia has underperformed and could use additional resources to sustain its growth as the mine heads towards a mind-boggling 2000m of depth.

From another they are concerning long-time SBM shareholders, who feel they could risk giving up control of one of Australia’s largest gold mines (~250,000ozpa) to a smaller player for no premium.

So has the upstart Genesis, run by the team behind former rags to riches gold success story Saracen, painted its potential partner into a corner?

A game of stratego

Raleigh’s strategy is absorbing.

The prevailing view in the market is the Leonora consolidation play, which started with Genesis’ deal to merge with Mt Morgans gold mine owner Dacian Gold (ASX:DCN), ends with Raleigh as the controlling boss of the assets.

Talking to media after his presentation, he claimed he’d be comfortable if the best option for shareholders was that consolidation of the rich Leonora gold district happened without Raleigh on top.

“It’s not about that for me. It’s about synergies to the benefit of shareholders now,” he said.

“I’m completely agnostic around that part of it. We’re trying to look at combining operational models, that makes a lot of sense.

“If that has me running it I’m happy to do that if there’s other reasons that are accretive for shareholders that doesn’t I’m also in line with that as well.”

Sure, but a consolidation play in Leonora without Finlayson’s star power would probably fall flat.

Should the deal go through at no premium and control it could be viewed as an admission from St Barbara’s board and management that someone else can do their job better.

If the St Barbara talks come to nothing, Finlayson has a decent story to fall back on around combining Genesis’ assets with Dacian’s Mt Morgans gold mine, something that could fast track Genesis from an exploration stock into a 150,000oz producer.

“If nothing else happens, we’re very comfortable with our base plan of doing 150,000oz,” Finlayson said.

“Jupiter ore right next to the plant with satellite ore coming from Genesis, we’re doing underground development now.

“The timing is beautiful, people, equipment, infrastructure coming out of Mt Morgans can come do the same thing on our ground so we wouldn’t have done that step if it relied on the next step to happen.”

It’s a tough position for St Barbara to be in.

That said, Finlayson did douse expectations by warning a tie-up with SBM or other consolidation beyond the $111m Dacian merger may not eventuate, refusing to confirm his interest in any other assets in the neighbourhood.

Consolidate this!

Finlayson was coy about what could go into a consolidation play in Leonora, and how quickly it could take place.

A number of operations in the region make theoretical sense, including Red 5’s (ASX:RED) 176,000ozpa King of the Hills, Kin Mining’s (ASX:KIN) 1Moz plus Cardinia gold project and Northern Star’s (ASX:NST) Carosue Dam.

Finlayson said consolidation of a region akin to Northern Star’s pocketing of the major gold operations around Kalgoorlie a few years ago under a single management team would make sense.

But he warned it could take years for all the pieces to fall in place if at all.

“I think these things play out in time. There’s some things we could go and rush and bolt them all together and you’re getting great, we’ve created this monster,” he said.

“But it’s not about growth, it’s not about size. It’s just about logic for me.

“It’s about logical orebodies that match mills. And it’s not as easily apparent now, we’ve got to dig a bit deeper into the resource statements and infrastructure to work out what I’m referring to.

“But for me, if we can unlock that – collectively we – I think that’s in the best interest of shareholders over a journey.”

Bull on gold

Diggers and Dealers keynote speaker and world renowned Zambian economist Dambisa Moyo pricked the ears of the gold bugs in the crowd after suggesting inflation and slowing economic growth could support a bull run for gold.

The metal is currently trading at US$1760/oz, with its mild performance this year sending equities sharply lower.

It hit a record of US$2067/oz in August 2020.

St Barbara is probably only in play right now because its share price has been hit by weakness in sentiment for gold miners, though a combination of a better commodity price, strong fourth quarter and the Genesis talks have added 40% in the past month after SBM hit a five year low of 75c on June 30.

Moyo, a former board member of Canadian gold giant Barrick, thinks a better future for gold is coming, ranking it above cryptocurrencies and the US dollar as a store of value in the current environment.

“I think in an inflationary environment I would expect the gold price to really appreciate and I’m actually surprised you haven’t seen more of a rally than we’ve seen, given where the energy price is as well as inflation is more generally, but I’m fundamentally a gold bull,” she said.

Finlayson thinks a potential bull run for gold could improve the rationale for his Leonora consolidation concept further.

“And if the keynote speaker’s correct, and we are coming into an environment where you’ve got the stagflation going on, maybe the gold price has its run, which it hasn’t had yet.

“I think like all these things, if you can consolidate a region into that run, a lot of these companies are strongly owned by institutional shareholders and that’s where the real value add can happen if we’ve got one or two fewer entities in that region.”

Leonora share prices today:

Falling values open a window, but Capricorn wants shiny and new

Falling equity valuations in the gold sector have opened a potential window for consolidation elsewhere in the sector to potentially acquire companies with established assets on the cheap, something which has been noted by ASX 100 gold miners like Evolution Mining (ASX:EVN) and Northern Star.

One of the few gold miners which has grown in the past couple years is Capricorn Metals (ASX:CMM), run by former Regis and Equigold boss Mark Clark.

While the All Ordinaries gold index is down ~19% year to date, Capricorn is up ~17% after hitting guidance at its new Karlawinda mine with 118,432oz at all in sustaining costs of $1112/oz, near the bottom end of its $1100-1200/oz guidance despite widespread inflationary pressure across the industry.

It is planning an investment decision by the end of the year on the similar Mt Gibson gold mine in WA.

But Clark is facing questions on whether further growth through M&A is at hand.

Despite falling sector valuations, Clark isn’t convinced purchasing an established miner would fit the bill.

“It’s not that I don’t like it, I think there’s a lot of companies doing a great job of wringing the neck of the assets they’ve got,” he said.

“Does that present the right opportunity for Capricorn and its shareholders?

“I suppose you look at everything, but we’re more likely to play to our strengths which is to find an advanced resource we can push through development, that we can use our skills to do that as cheaply as possible.

“That we can do with our own team and then bring something into production.

“It’s not to say we don’t look at all the usual suspects, but we’re more likely to go the route of finding a project that maybe needs expertise, a change of philosophy or different approach to take it forward.

“Historically every company we’ve been involved in all our projects have been advanced resources with visibility to becoming a mine and I think what we’ve proven to be good at is the execution part.”