Endeavour Mining to buy Teranga Gold, creating top 10 gold miner

Canada’s Endeavour Mining (TSX: EDV), already West Africa’s top gold producer, has agreed to buy Teranga Gold (TSX: TGZ) in an all-share deal worth $2.44 billion (US$1.86 billion), which would create a top-10 gold producer.

The Toronto-based miner is offering 0.470 of its own shares for each Teranga share, a 5.1% premium to Teranga’s closing price on Friday.

Endeavour shareholders will end up with 66% of the combined entity, with Teranga shareholders holding the remaining 34%. Teranga will get three seats on the board to Endeavour’s seven.

La Mancha, the vehicle in which Egyptian billionaire Naguib Sawiris holds his stake in Endeavour, will invest a further $200 million into the combined miner, leaving it with a 19% stake.

Endeavour’s acquisition of Teranga adds another operating asset — Wahgnion — to its four existing mines in Burkina Faso. It also gives it exposure to Senegal through the Massawa project, which Teranga bought from Barrick Gold (TSX: ABX; NYSE: GOLD) last year.

A successful deal would consolidate Endeavour’s growth, which completed in July the acquisition of smaller rival Semafo, bringing together six mines with strong cash flows into one portfolio.

The company had previously tried to buy Egypt-focused Centamin (TSX:CEE; LSE: CEY), but talks failed to deliver a deal.

Among top dogs

The combined miner, which aims to list in London next year, will produce 1.5 million oz. gold per year from six core operating mines in three countries — Senegal, Burkina Faso and Côte d’Ivoire.

It would also be amongst the most valuable precious metals companies listed on the London Stock Exchange, which includes Russian duo Polyus (LSE: PLZL) and Polymetal International (LSE: POLY), Mexico-focused Fresnillo (LSE: FRES) and Canadian Yamana Gold (TSX: YRI; NYSE: AUY; LSE: AUY).

The deal is expected to close in the first quarter of 2021.

Sebastien De Montessus, Endeavour’s chief executive, and Teranga chief executive Richard Young, hosted a joint webcast to discuss the rationale for the business combination.

“We are, with Richard, incredibly excited about this transaction, as it makes sense on so many levels, and offers a strong opportunity for rerating for both sets of shareholders,” De Montessus said on the call. “We believe that this transaction follows the successful M&A trend we are currently seeing across the industry. There are many examples where good companies not necessarily needing to do M&A have come together and have immediately created value for their shareholders. We believe this transaction will do the same.”

“First, and of utmost importance, this combination has a very compelling industrial logic,” Endeavour’s chief executive continued. “It combines two high quality West African asset portfolios at a time when both companies have recently completed investment phases and are now generating healthy cash flows. As such the future looks bright for both companies, and even brighter together. Secondly, as a result of this combination, we will create a new top 10 senior gold producer with very strong attributes.  Production will be diversified across several flagship mines and across three countries, and we will also have an industry-leading growth pipeline and arguably the largest and highest quality exploration portfolio in West Africa.”

De Montessus noted that while both companies have strong re-rating potential on a stand-alone basis, both management teams envision an even larger upside through the combination to accelerate re-ratings for both sets of shareholders. The combined company, he added, “will have among the most attractive trading multiples compared to its senior gold peer group,” and a re-rating “will be supported by an enhanced capital market profile.”

Teranga’s Young added that the merger creates”a best in class senior gold producer” that will have “among the lowest all-in sustaining costs of any senior gold company” as well as the “best growth profile.” “What’s new for Teranga shareholders is a more diversified production base … a stronger balance sheet, an attractive dividend and the scale and liquidity required to attract generalist investors.”

Mining analyst Raj Ray of BMO Capital Markets was positive on the transaction. “We like the strategic rationale for the combination with respect to asset quality, diversification and potential synergies in West Africa, larger production profile and potentially improved share liquidity,” he wrote in a research note following the announcement. “The combined entity will also be targeting a second listing on the London Stock Exchange.”

Craig Stanley, who covers Teranga at Raymond James, does not believe a competing bid is likely. “First, Tablo Corp. and Barrick, Teranga’s largest shareholders who together control 33%, are supportive,” he wrote in a research note. “Second, only a handful of producers are big enough to offer a higher bid and would involve these companies increasing their exposure to West Africa. Third, Endeavour is the most sensible acquirer given the synergies and West African experience.”