Ground Breakers: Here's that M&A you were all waiting for as Red 5 and Silver Lake ink deal

Silver Lake and Red 5 announce $2.2 billion gold merger

‘Merger of equals’ will create 445,000ozpa WA gold producer

Lynas says it has ended discussions over merger with west’s other big rare earths producer

Red 5 (ASX:RED) and Silver Lake Resources (ASX:SLR) shares have both fallen into the … er … red, as the companies announced a ‘merger of equals’ that will combine two of Australia’s most notable mid-tier gold miners.

The deal will see Silver Lake boss Luke Tonkin take the MD reins with Red 5’s Russell Clark of a combined company producing 445,000oz a year.

That would put it in the same class from a production perspective as Regis Resources (ASX:RRL), with Silver Lake shareholders to get 3.434 RED shares for every SLR share they hold. That would see RED shareholders own 51.7% of the combined company, which would have a reserve and resource of 4Moz and 12.4Moz respectively across four operations in WA and Ontario, Canada.

The deal has already drawn the ire of Silver Lake investors, who have notoriously sold down on a number of corporate transaction attempts in recent years, notably an attempt to scupper Genesis Minerals’ (ASX:GMD) purchase of St Barbara’s (ASX:SBM) Gwalia gold mine last year.

Silver Lake shares fell 13.4% in early trade with RED down 1.5%. RED has a $1.13b market, with SLR at a $1.03b valuation this morning.

Silver Lake became Red 5’s largest shareholder last year by amassing a ~12% stake in the Goldfields miner.

On a pro-forma basis the combined company would boast a market cap of over $2.2b before trade began this morning. RED brings to the deal the largest and longest life asset in its King of the Hills gold mine near Leonora, which is expected to produce 195,000-215,000oz this year at all in sustaining costs of $1850-2100/oz.

Silver Lake’s Deflector, acquired in its previous takeover of Doray Minerals, is the best performing asset in the group, expected to produce 120,000-130,000oz this year at $1500-1650/oz, assisted by copper credits.

Meanwhile Mount Monger, the long running operation east of Kalgoorlie which has been the mainstay of Silver Lake’s business, will deliver 90,000-100,000oz at $2300-2500/oz this year.

Combined that comes in at between 405-445,000oz at $1850-2074/oz.

Who wins here?

The deal has been marketed as a nil-premium merger, with the companies to move behind only Northern Star (ASX:NST), Evolution Mining (ASX:EVN) and West African Resources (ASX:WAF) in ASX gold reserves and those three along with Genesis Minerals on gold resources among producing gold miners.

They would also have a combined $378 million in net cash and listed investments, though that includes Silver Lake’s ~$136m holding in Red 5, which will either be monetised or cancelled during the first year of the deal.

That improved balance sheet strength could support Red 5’s debt repayments and large hedge position, with the finance still to be fully repaid on the redevelopment of King of the Hills.

Clark said on a webcast the larger company would boast greater power in future M&A initiatives.

“So from RED’s perspective, I think it’s very positive. From Silver Lake’s perspective it gives them a much longer term asset,” he said.

“I think it moves the combined company into a different space from a gold production perspective and puts us in a great position to be acquisitive in the future and that’s something we’ll look at once we’ve bedded the company down.”

But Red 5’s management did face questions from analysts on the deal, in particular the fact Silver Lake’s assets are far shorter in mine life, while its Sugar Zone mine in Canada requires significant investment in exploration to bring back to life after being placed on care and maintenance last year.

Comparing Deflector and Mount Monger to Red 5’s long-running Darlot mine, they say there should be years ahead of them with additional drilling.

“I think they’ve been quite conservative in the way that they’ve been talking up their assets and we see the potential there for an extension of the underground mines that they have,” Clark said.

“You would be familiar that in these little underground mines it’s difficult to get a see through that goes on for many years unless you do a massive drill out and like Darlot that’s had a three-year mine life for the last 20 years, that’s what we’re sort of seeing in their operations.”

The deal has been done on an exclusive basis with standard ‘no shop, no talk provisions’, but both Silver Lake and Red 5 can pull out if a superior proposal emerges.

It will be subject to Silver Lake shareholder approval and an independent expert’s report.

Red 5 (ASX:RED) and Silver Lake (ASX:SLR) share prices today

Lynas knocks back merger talk

Depressed market valuations are bringing these types of scrip based mergers back into focus, with talks also going on in the rare earths space.

It emerged over the weekend that Australia’s Lynas Rare Earths (ASX:LYC) had been in discussions with MP Materials, the major US producer of NdPr at its Mountain Pass project in California.

The deal would create a major rare earths producer of scale outside China, sculpting a Western player with the clout to match the firms in China’s dominant domestic industry.

Lynas responded to reports in the AFR about the takeover speculation to say while it was in confidential discussions about a transaction with MP, which is listed in New York but boasts China’s Shenghe Resources as a major shareholder and offtaker, the discussions were not ongoing.

But the door was left ajar for future M&A from Lynas, which has like other companies been hurt by weakening rare earths pricing over the past year.

Lynas has seen its share price fall 38.2% over the past 12 months as average selling prices tumbled from $58.4/kg in December 2022 to $28.7/kg on lower index prices and an increase of cheaper rare earths in its product mix in the recent December quarter.

But it has maintained a major growth plan that includes the $500 million expansion of its Mt Weld mine to facilitate production of up to 12,000tpa of NdPr, with a mid-stream processing plant Kalgoorlie due to open soon and both light and heavy rare earth separation plants on the way in Texas, where they are being funded by the US Department of Defense.

“Lynas is implementing a strong organic growth plan. In addition, Lynas continues to seek opportunities to use our proven expertise to build scale, improve market functioning and add value for shareholders,” the company said in a statement.

It all came on a tough day for mining stocks, with the big iron ore miners eating heavy losses and the materials sector off over 2% on a strong US jobs report that hurt gold and base metals and a big drop in iron ore prices on Friday.