Pinned straw:
02-Dec-2024: Northern Star agrees to acquire De Grey.pdf
And: Presentation - Northern Star agrees to acquire De Grey.pdf
Deets:
- Northern Star agrees to acquire De Grey by way of a recommended scheme of arrangement, with De Grey shareholders to receive 0.119 new Northern Star shares for each De Grey share held; and
- De Grey’s flagship project, Hemi, provides Northern Star with an additional Tier-1 future low-cost production centre, aligning to its strategy to deliver superior shareholder returns.
A Tier-1 gold asset is defined as an operation producing in excess of 500kozpa of gold per annum with a 10+ year mine life.
At 1:42pm Sydney time, DEG is trading up +26.45% (or +40.2 cps) @ $1.922 and NST is trading -7.37% (down -$1.29) @ $16.22.
I have to do some work on whether the price paid is reasonable here, but as an NST shareholder I am encouraged that NST have used their scrip for this deal rather than cash, so this doesn't result in any change to their cash or debt positions.
This deal (0.119 new NST shares for each DEG share) represents an implied offer price of A$2.08 per De Grey share and a total equity value for De Grey of approximately A$5 billion on a fully diluted basis, based on the closing price of Northern Star shares of A$17.51 on Friday (29 November 2024) - obviously a bit less now since NST's share price has dropped today.
The Scheme is unanimously recommended by the Board of Directors of De Grey, and each De Grey Director intends to vote all De Grey shares that they hold or control in favour of the Scheme, in each case, subject to no Superior Proposal (as defined in the SID - Scheme Implementation Deed) emerging and the Independent Expert concluding (and continuing to conclude) in the Independent Expert’s Report that the Scheme is in the best interest of De Grey shareholders.
The Scheme Consideration represents a significant and attractive premium of:
- +37.1% to De Grey’s last closing share price of A$1.52 per share on 29 November 2024; and
- +43.9% to De Grey’s 30-day volume-weighted average price (VWAP) of A$1.45 per share up to and including 29 November 2024.
Upon implementation of the Scheme, Northern Star shareholders will own approximately 80.1% of the combined Group and De Grey shareholders will own approximately 19.9%.
Here's the 5 year SP graphs of both companies up until today:
Here's the important stuff (IMO):
So NST's Ore Reserves increase by +29% to 26.9 million ounces, and their Mineral Resources increase by +22% to 74.9 million ounces.
Low cost - Hemi should be in the lowest quartile of the AISC (cost) curve.
Consistent with NST's purpose of generating superior returns for shareholders.
So, I'll have a think about the price, but at this stage, I'm happy enough with this as an NST shareholder.
@Strawman how do all-scrip deals get handled on our SM portfolios if the deal goes ahead? Do our DEG revert to NST (and if so, how is profit accounted?), or does the portfolio pay us out in cash at the implied value of NST shares @ execution?
FWIW here's a summary of the initial thoughts of some of the brokers covering NST (before this morning's conf call)
JP Morgan: Overweight PT $18.25
Northern Star Resources have announced an all scrip acquisition of De Grey (DEG AU) via scheme of arrangement valuing the company at $2.08/sh or ~$5bn, which is 19% above our $1.75/sh PT (based on our $1,800/oz LT real gold price). We value DEG at $2.15/sh on a scenario using $2,000/oz LT gold price. Overall, we view this as a good outcome for both parties. Hemi has a current 12-year mine life and is scoped to do ~530kozpa over the first 10 years (553koz over the first 5 years) with further production upside potential through its Western Concentrator (scoping study +150kozpa), and UG potential (study had been slated for DecQ24).
• Price looks full on Hemi base case after a re-rate for producers through 2024...
• … But material upside to ~500kozpa production base case
• A foray into greenfields development
Morgan Stanley: Underweight PT $15.60
Acquisition of De Grey at ~45% premium to VWAP; stay UW
What Happened?
NST has entered into a Scheme Implementation Deed with De Grey Mining (DEG.AX, not covered) to acquire 100% of De Grey’s shares under a board recommended scheme of arrangement
Our View:
- We remain UW
- Given the project to be acquired is still in development phase, we question the size of the premium given no accretion till FY29, and no synergies with NST reviewing DFS capex estimates - implying some capex risk
- NST already has significant gold production growth in the pipeline (FY24: 1.65Moz to FY27e: 2.17Moz), hence the deal despite its merits (location and project potential) will create further pressures for NST as project development will overlap that of the KCGM expansion (in FY26). However, it would provide another pillar of growth post current projects (given some have shorter lives)
- The price paid per ounce of gold in development phase seems broadly fair (US $305/oz for reserves, and US$135/oz for resources)
RBC: Outperform PT $18.50
DEG — premium sufficient: we consider the 37% premium provides adequate premium for the project which still maintains certain risks. Hemi has project development risk, permitting risk, higher capital costs, the potential of DEG requiring additional capital, and operating risk notably for processing semi-refractory ore (note). Our analysis found DEG should largely be able to manage technical risks. We value DEG at A$4.3bn (A$1.80sh), which implies a 16% premium paid by NST. There is also upside potential from spot (A $3.70/sh) and from underground growth and a Hemi milling expansion to ~15Mtpa. Overall a positive outcome for DEG in our view
NST assumes technical risks for value: Due to perceived project risks, the timing of this offer could give NST a more value accretive entry point. In our view, NST has a good operating track record, strong technical expertise, a strong balance sheet and is cash flow generative. This should help allay fears of those risks. Notably ahead of receiving final environmental permits in the next 6-9 months, which we considered likely. We have long argued the takeover appeal of DEG, and it has likely been scrutinised by multiple global major gold companies
NST — fair value portfolio upgrade: We forecast DEG production to reach ~700kozpa and potentially >900kozpa (note). This would lift NST's long-term group production target from ~2Moz closer to ~3Mozpa. It would provide more global relevance to NST, and importantly lower NST's group AISC (NST FY25e A$2030/oz vs DEG LOMe ~A$1700/oz). NST trades at FY26e EV/EBITDA 5.6x (EVN RBCe 6.2x), and greater scale with lower costs could help its group premium (P/NAV 1.44x). DEG should be a substantial portfolio upgrade for NST, but would be earnings dilutive until first production in FY26/FY27e. Overall, we see this deal as a near-term neutral for NST, but with upside as the project progresses
Macquarie: (are currently on research restrictions for NST - presumably because they are involved with the deal) - they had previously (on 25/10/24) been Outperform PT $20
Why it matters
Acquiring DEG: NST will acquire 100% of DEG in an all scrip recommended scheme of arrangement with a headline value of A$5.0bn. The deal is unanimously recommended by the DEG board. DEG shareholders will receive 0.119 NST shares for every DEG share held which represents an implied price of A$2.08/sh, a 37% premium to prior close price of A$1.52/sh. DEG had A$828m in cash (at 1QFY25-end) with the deal implying an EV of A$4.2bn, or a 48% premium compared to DEG's undisturbed EV. Upon implementation NST shareholders will own 80% of the combined entity while DEG shareholders will own 20%. The scheme is expected to be implemented in late-April/early-May 2025
DEG brings Hemi: DEG’s key asset is the Hemi Gold Project (Hemi) located in the Pilbara of Western Australia. Hemi is a large scale open pit (with underground potential) development project with 11.2Moz of gold resources and 6.0Moz of reserves with forecast (using DEG's most recent DFS - Sept 2023) average annual production of 530kozpz over the first 10-years with a mine life of >12-years. The DFS envisaged a 10Mtpa POx process plant with a pre-production capex of A$1,345m and a LOM AISC of A$1,337/oz. NST notes that it will update Hemi's Capex and AISC guidance ahead of a FID but adds that Hemi supports NST's goal of being in the first half of the global gold production cost curve
Looking towards 2.5Mozpa: Hemi will be a 4th production centre for NST. NST intends to transition its projects team from the KCGM mill expansion (remains on track) to Hemi with approvals a key factor in the project's development timing. NST notes that it is on track to reach ~2.0Mozpa of gold production in FY29, once the KCGM mill expansion is fully ramped-up, but notes that Hemi could boost production in FY29 to ~2.5Mozpa
DISC: Held in RL & SM
02-Dec-2024: NST’s $5B Deal: Most Expensive Undeveloped Gold Mine Ever (Money of Mine podcast)
"There’s only one thing to talk about today… Northern Star’s big swing for De Grey. This friendly, all-scrip deal which implies a A$5b value for the developer of Hemi is the biggest deal of its kind, so we’ve got plenty to chat about."
CHAPTERS
0:00:00 Introduction
0:01:40 NST make $5b move for DEG
0:08:21 Will Gold Road get in the way
0:13:23 How does Hemi fit into NST
0:22:03 Hemi's met
0:35:12 Thoughts on the deal
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[I do currently hold DEG and NST, but not GOR]