Endeavour Mining and Centamin agree to explore potential merger

Endeavour Mining (TSX: EDV) and Egypt-focused miner Centamin (TSX: CEE; LON: CEY) have agreed to assess the merits of a merger that would create a mid-tier gold company with an almost $4-billion market value and annual output of more than 1.2 million ounces.

The announcement follows weekend talks in Perth, Australia, between Endeavour’s chief executive, Sébastien de Montessus, and Centamin’s chairman, Josef El-Raghy.

The meeting was arranged after Centamin rejected Endeavour’s $1.9-billion, all-stock takeover bid in December, saying it did not offer enough value to its shareholders.

It also noted a business combination would expose the company to the deteriorating security situation in Burkina Faso, as almost half of Endeavour’s gold resources are located in the West African country.

At least 37 civilians were killed and more than 60 wounded when gunmen ambushed a convoy transporting workers of Canadian gold miner Semafo (TSX: SMF) in eastern Burkina Faso in November.

The Toronto-listed miner, which seeks to gain control of Centamin’s Sukari gold mine in Egypt, said a reciprocal due diligence exercise would be a “critical precursor” to determining a deal.

“The objective … would be to allow both companies to further understand each other’s assets,” Endeavour stated.

The Sukari gold mine is a 500,000 oz. per year operation and one of the world’s top-10 deposits of the yellow metal. However, the company has struggled with operational issues at the mine, which have weighed on the asset’s performance and on Centamin’s share price.

Sukari — which began operations in January 2010 and is Egypt’s largest gold mine — is made up of a large open pit and an underground portion. Last year, the company worked on operational improvements on both sections, but they took longer than planned to materialize, which affected output.

Centamin began 2019 with key board changes, including moving El-Raghy from executive chairman to chairman, 16 years after becoming managing director. He remains linked to the company while it searches for a successor.

In the months to follow, the company struggled to boost production at Sukari, its only operating mine, and the disappointments ended with the departure of Centamin’s chief executive officer, Andrew Pardey, announced in October.

Like El-Raghy, Pardey agreed to stay at the post for a year, while Centamin looks for a new boss.

Montessus said he was “disappointed” with Centamin’s refusal to discuss a business combination at a time when investors were pushing for consolidation in the gold sector.

“Centamin’s shareholders are currently disadvantaged by the Sukari mine being managed within a single-asset portfolio, by the recent operational challenges,and the ongoing leadership transition at Centamin,” he said.

A potential agreement would be just one more of the many mergers and acquisitions that have swept the gold sector, with deals worth $30.5 billion so far this year.

The frenzy, kicked off by the highly publicized, multibillion-dollar mergers of Barrick Gold (TSX: ABX; NYSE: GOLD) and Randgold Resources, and Newmont Mining and Goldcorp, has picked up speed. China’s state-backed Zijin Mining offered $1 billion for Continental Gold (TSX: CNL; US-OTC: CGOOF) in early December, and Kirkland Lake Gold launched a $3.7-billion offer for Detour Gold (TSX: DGC) in late November.

Under English takeover rules, Endeavour has until the end of December to make a firm bid. Given the time that has elapsed since it went public with its offer, it has asked the takeover panel for more time to work on the new bid.

“Centamin has however not yet done this and there can be no certainty that they will,” Endeavour said. It also said it was prepared, subject to agreement on due diligence, not to make a formal offer unless it was recommended by Centamin’s board.

“The ball is firmly back in Centamin’s court,” analysts at Berenberg said in a note.  “We look for an announcement from Centamin either agreeing to or rejecting the extension to the put-up-or-shut-up terms.”