Everyone's a target – Why gold's M&A rush will continue

Northern Star’s planned $5 billion all scrip takeover of De Grey Mining has investors asking ‘what’s next’?
Argonaut’s Hayden Bairstow says there could be more to come in gold M&A
With prices high “any single asset company” is a target or merger proposition

Northern Star Resources’ (ASX:NST) $5 billion takeover of De Grey Mining (ASX:DEG) and Sumitomo’s $615 million punt on a 30% stake in Rio Tinto’s (ASX:RIO) Winu gold mine are the latest in an ongoing rush of dealmaking in the ASX gold sector.

But with prices above $4000/oz Australian, anything that isn’t bolted down, and even what is, is likely a target according to experts who say the days are numbered for single asset miners.

Argonaut executive director and head of research Hayden Bairstow told Stockhead the De Grey deal, which will see Super Pit owner NST take control of the $1.3 billion development of the 530,000ozpa Hemi gold mine in the Pilbara in exchange for ~20% of its shares, was not a surprise.

Even before this week there was already a prominent gulf between $20 billion capped Northern Star and the Australian mid-tier, which has a host of players around the $2-3 billion market cap striving for relevance from institutions.

That doesn’t mean M&A will take place, Bairstow noted. But he said the prominence of single-asset dominated producers on the ASX means more consolidation is logical.

“I would say every company that’s only got one asset is an obvious target or an obvious play to do something else,” he said.

“You look at Ramelius Resources (ASX:RMS) has got one asset now. They’ve got the Rebecca-Roe project they could develop and perhaps with this Northern Star-De Grey deal getting done (Northern Star’s) Carosue Dam comes up fro sale –it’s sub-50km from Rebecca-Roe so that would be an obvious facility they could utilise.

“There’s also been talk about further consolidation around Leonora, which was obviously Vault Minerals (ASX:VAU) and Genesis Minerals (ASX:GMD), but it remains to be seen if there could be anything happening there.”

What’s the trigger?

Bairstow says another deal of the scale of Northern Star-De Grey is unlikely given the composition of the ASX gold sector, with $10bn Evolution Mining (ASX:EVN) – increasingly copper focused – trailed by a host of mid-tiers in the $2-3bn range.

But mergers within that subset are still “highly likely”, he said.

“Everyone else in the sector is $2-3 billion, most of them, so we’re not going to see another $5bn deal on that basis, but a combination of two $2bn companies is still highly likely.”

Some of that’s already happened. Red 5 and Silver Lake merged to create Vault this year, as did Westgold Resources (ASX:WGX) and TSX-listed Karora. Ramelius also has over 18% of $1.5 billion capped Spartan Resources (ASX:SPR), owner of the vaunted Never Never discovery in WA’s Mid West.

Last year’s combination of Newmont and Newcrest Mining led to a $2bn firesale of its lower-tier assets, including the US$475 million sale of WA’s Telfer gold mine and majority Havieron JV stake to junior partner Greatland Gold, due to close yesterday.

Whether Northern Star may move on some of its smaller assets from what will be a 2.5Mozpa portfolio post the development of Hemi remains to be seen, and is unlikely to be in play until the second half of 2025 – the De Grey purchase is scheduled for completion around April/May.

What Gold Road Resources (ASX:GOR) does with its 17.3% stake in De Grey – if it sells out before the deal to an interloper or accepts the offer to realise an $825 million win next year – is also going to bring a cashed up player into the market.

It’ll put GOR in a piss or get off the pot position (our words FYI), having previously moved away from the purchase of a non-operating stake in a Canadian mine this year after investor blowback.

“It leaves them with a market cap that is half cash, basically,” Bairstow said.

“So then they’ll be sitting on a huge pile of cash, which they will have to give back to shareholders or find something to do with it.

“They’ll be almost forced into doing something one way or the other, whether it’s give the money back or go look at something merging with someone else that needs a bit of cash, which is probably the obvious one.”

The logical deal

Press speculation had largely pointed to Barrick and, in particular, fellow Canadian Agnico Eagle as the primary bidder for De Grey.

But Bairstow wasn’t surprised in the Northern Star announcement, noting their superior position in the Australian market and deep operating experience on refractory ores.

The nature of the Hemi orebody means it will require a pressure oxidation process to liberate some of the gold. NST has for years produced gold from refractory ores using different processes at Kanowna Belle, which has WA’s last gold roaster, and KCGM, which will shut down the ultra-fine grinding mill at Gidji (the location of a former roaster) when its major redevelopment of the Fimiston Mill in Kalgoorlie is complete in 2027.

The deal has been completed without a cash component at a 37% premium, which Bairstow says takes fluctuations in the spot price of gold out of the equation as it moves to completion.

“Will (Hemi) hold that 20% or will it grow that 20%. If we go forward 3-4 years’ time once it’s in production, is it going to be worth more than 20% of Northern Star?” Bairstow commented.

“And if the answer is yes, then it’s a good deal for Northern Star shareholders. I certainly think it probably will be and as far as De Grey goes trying to fund a huge capital project like that is inherently risky.

“So for them to sell out pre-build makes sense as well, because Northern Star are paying, I think, fair value or something around that sort of number. When I plugged all this into my Northern Star numbers, I didn’t drop my Northern Star price target. I didn’t find it diluting from a value point of view. But it didn’t really increase it all that much either.”

Once both Fimiston and Hemi are ramped up to full bore, from 2029, they should contribute well over half of Northern Star’s gold output at 900,000ozpa and 530,000ozpa respectively.

But the ounces at Hemi are expected to come in at a cost well below NST’s average, at least on its 2023 DFS metrics.

Jarden analysts led by Ben Lyons told clients the deal would be 20% earnings per share dilutive until Hemi is brought into production in 2027, adding to the capex NST is putting into its Super Pit underground and Fimiston mill expansion.

Lyons said it was an example of pro-cyclical M&A in the sector, with prices continuing to run at ~US$2650/oz.

“With gold prices (and NST scrip) trading near record highs, we view the proposed transaction (and large premium) as pro-cyclical, and note that there has been ample opportunity to bid DEG at lower prices to benefit from the ongoing exploration discovery and Resource growth,” he wrote of the deal’s timing.

Goldman Sachs’s Hugo Nicolaci, Paul Young and Isaac Brooke said the deal had a positive read through for Gold Road, which they say is trading discounted to peers on its own fundamentals. Goldman has a $2.35 PT on GOR, which was trading unchanged at $2 on Wednesday.