Aris Gold, GCM Mining rise on all-share merger deal

Colombia focused precious metals producers Aris Gold (TSX: ARIS) and GCM Mining (TSX: GCM) have announced an all-share merger deal that will see GCM — already a major shareholder of Aris — acquire all remaining outstanding shares. 
 
GCM currently holds nearly 61 million Aris shares, representing about 44.3% of the issued and outstanding common shares of the Vancouver-headquartered Aris. 
 
The new company will take Aris Gold’s name, with Ian Telfer taking the role of chair and Neil Woodyer as CEO in the combined entity. Both men had the same roles with Aris before the merger. 
  
In a news release on Monday, Woodyer said the new company is building a gold mining business with scale, cash flow, a high-quality growth pipeline and a financial position with US$397 million of cash and $260 million in additional funding. 
  
“Our teams are well known to each other, and together we will optimize the delivery of the growth projects to unlock shareholder value,” he said. 
  
“The combined group creates a top-in-class company with multiple tier one assets,” Telfer said. “After Aris Gold became operator of the Soto Norte joint venture, joining forces with GCM became a logical next step. Our increased scale will also broaden our future opportunities to continue building a +1 million ounce producer over the next few years.” 

Each outstanding Aris share not held by GCM will be exchanged at a ratio of half a common share of GCM for every common share of Aris. 
  
The deal will, among other outcomes, create what GCM called the largest gold company in Colombia, building on Aris’s ownership of the Marmato mine, its Soto Norte project (where it became operator in March) and GCM’s high-grade silver and gold-producing Segovia operations. 
  
It also adds GCM’s Toroparu project in Guyana, an advanced stage open pit and underground gold mine with estimated production of 225,000 oz. per year over a 24-year mine life, according to its preliminary economic assessment; and the advanced Juby gold project about 100 km southeast of Timmins, Ont. 
  
The new entity will bring together production, development and exploration assets with proven and probable reserves of 3.8 million oz. gold, measured and indicated mineral resources of 18.3 million oz. gold and inferred resources of 7.7 million oz. gold. 
 
In addition, the companies believe the agreement will build a strong financial basis for de-risking their growth projects, with combined cash and committed funding of US$657 million and free cash flow from the Segovia operations of US$84 million on a 12-month trailing basis to Mar. 31, 2022.

Inside the processing facilities at Aris Gold’s Marmato project in Colombia. Credit: Aris Gold

Timing, execution risk of development projects questioned 

While shares of both companies rose on the news, Haywood Capital Markets mining analyst Kerry Smith said in a research note on Wednesday that the firm recommends shareholders not accept the offer.  

“If gold were to rally over US$2,000 per ounce in the mid-term, the market would certainly pay for the significant resource base and production profile in the new company, but not today,” Smith wrote. 

Smith added that “the additional financing and execution risk with GCM’s earlier stage development project in Guyana, combined with Soto Norte, is more than we would like.”

He also called the combination of the formerly separate companies’ Colombian operations “a bit premature” due to Aris’s “upside over time” as it executes on the Marmato expansion.

“In our view, this merger is too early, and the market will not pay up for the perceived higher growth and resource profile, given the permitting, financing and construction risk,” he said. The merger requires the approval of more than two-thirds of Aris Gold shareholders and a simple majority of GCM shareholders, in addition to regulatory approvals. Shareholder votes are expected to take place in mid-September. 
 
In contrast to Haywood’s assessment, Taylor Combaluzier of Red Cloud Securities said in a Tuesday note that the transaction is positive for both companies as the combined entity “should be in a stronger position to advance its projects in the face of the current market environment and offer more opportunity over the long run for investors to realize a potential re-rating.” 
 
The analyst further explained that Red Cloud sees the merger as an opportunity to unlock the potential of the Segovia operation. 
 
“The company has also replaced its mined resources at Segovia for six straight years and continues to have success with the drill bit, which supports our view that Segovia’s main mines remain underexplored and are potentially larger than envisioned,” Combaluzier said, adding that the new Aris would bring a strong leadership team that is ready to become a “significant mid-tier gold producer.”

Red Cloud maintains its buy rating for GCM and slightly lowered its price target to $16.75 per share from $17 per share. For Aris, the bank moves its rating to tender (from buy) and lowers its price target to $4.50 from $5.75. 

The merger comes almost two years after GCM – then known as Gran Colombia Gold – became a 45% shareholder in Colombia-focused Caldas Gold before it became Aris Gold and acquired the right to appoint two directors to Aris Gold’s board. 
 
One year later, Gran Colombia changed its name to GCM Mining Corp. 
 
At press time in Toronto, Aris Gold shares were trading at $1.84 a piece, up 19¢ or 11.5% from the start of the day. The stock has traded in a 52-week trading range of $1.21 and $2.25. Its market capitalization was $254.9 million. 

GCM shares were trading at $3.73 each, up 33¢ or 9.7%. Its stock has traded in a 52-week range of $3.13 and $6.13. Its market capitalization is $364 million.