My initial thoughts on this Transaction is that it is a worse outcome for SBM shareholders than the previous proposal of a merger of SBM and GMD to form Hoover House and then a demerger of the non-Leonora assets into a new company to be called Phoenician Metals. But this is clearly a better outcome for Genesis (GMD) shareholders.

And I hold SBM shares, but no GMD shares.

But it is what it is. SBM are now in even worse shape than I thought they were, as explained in today's announcement:

The St Barbara and Genesis Boards have, by mutual agreement, terminated the scheme implementation deed between the parties in relation to the Scheme and the Demerger, predominately due to the material increase in funding requirements, in part driven by:

• Gwalia’s underperformance (revised Leonora guidance of 130-135koz for FY23) has resulted in a significantly lower cash position against forecasts;
• St Barbara has C$41 million of Environmental Performance Bonds (“EPB”) at Atlantic which are supported by Letters of Credit from syndicate banks. There is potential for the quantum of EPB to increase materially to approximately C$70 million, and the face value of the EPB would likely need to be cash backed; and
• As announced on 2 March 2023, non-receipt of approval for in-pit tailings disposal at Touquoy, which results in materially lower cash flow from Atlantic in the near-term.

In addition, given the increase in funding requirements for St Barbara (driven by the issues outlined above), and expected breach of St Barbara’s existing banking covenants (interest cover ratio) at 30 June 2023, it is likely that St Barbara would have been required to pay down a significant portion of its senior debt facilities (current total of $160 million, comprising $70 million and C$80 million).

The revised Transaction will result in St Barbara shareholders collectively having economic exposure of up to ~19.5% of Genesis post acquisition (15.2% excluding contingent consideration). Importantly, the Transaction will enable St Barbara to extinguish all senior debt and lease liabilities, and will hold a pro-forma cash balance of approximately $197 million. It is anticipated that St Barbara’s shareholding in Genesis (excluding the contingent consideration) will be substantially, if not fully, distributed to St Barbara shareholders via a return of capital post Transaction.

Key benefits to St Barbara shareholders under the revised Transaction relative to the Scheme include:

• An increased shareholding in the offshore assets of St Barbara from 80% (under the previously proposed Demerger of “Phoenician Metals”) to 100%;
• An additional ~ $110 million cash in the balance sheet compared to the Demerger scenario, whilst also having the ability to extinguish all senior debt; and
• Increased transaction certainty, given that the Transaction will (unlike the Scheme) not be subject to a maximum net debt condition precedent, as well as a reduced anticipated timeframe for completion of the Transaction.

The implied Transaction value of $600 million compares favourably to St Barbara’s market capitalisation of $527 million, and enterprise value of $639 million prior to St Barbara’s shares entering into trading halt on 4 April 2023, with St Barbara shareholders also benefiting from:

• the retention of the Atlantic and Simberi operations;
• a portfolio of listed investments; and
• a number of other royalty interests over mining, and exploration assets

Assumptions: That's all based on the Genesis capital raising price of $1.15/share, a AUD/CAD exchange rate of 0.89, and the $600m sale price being subject to the Genesis share price being at or around the raising price of $1.15 at time of completion of the Transaction (because of the Genesis shares that are included in the transaction value; only $370m of this is going to be paid as cash, with the remainder of the $600m sale price being made up with GMD shares, and some of those - i.e. $60m worth - being deferred until Genesis get Tower Hill into production). Obviously if the GMD share price is higher than $1.15 at the time those GMD shares are issued to SBM, the value to SBM (and their shareholders) is greater, and the opposite is true if the GMD share price is lower than $1.15 at the time the GMD shares are issued to SBM. GMD closed at $1.21 today, up 10% (or 11 cents) for the day.

I also note that the SBM Board is unanimously recommending this transaction as a replacement for the now-cancelled merger proposal, and that St Barbara’s financial adviser is Macquarie Capital (Australia) Limited, and I doubt that that MQG as SBM's financial advisors would have negotiated this if they thought it was a bad outcome for SBM, or if they thought a better outcome was possible and indeed potentially do-able.

Basically, with St Barbara set to breach one of their debt(/"banking") covenants at the end of June (interest cover ratio) the banks could call in the majority of SBM's outstanding debt immediately - up to A$160m - potentially causing them to sell Gwalia anyway at a lower price (firesale price because they would be forced sellers at that point). They could instead try to sell off Simberi or the Atlantic (Nova Scotia) assets, but I don't think they'd get enough for them to get them out of trouble (clear their debt and leave them enough working capital to continue running their remaining assets).

I didn't think St Barbara had a debt problem, but it's that "hidden debt" - Environmental Performance Bonds in this case (EPBs) - that has come out because of the their various issues in Nova Scotia and Touquoy having to be shut down prematurely - as explained back in February here - Minister-response-to-in-pit-tailings-environment-assessment.PDF

They didn't get knocked back (as in a definite NO) for their application to use the Touquoy open pit as a tailings dam or a tailings storage facility (TSF), but on the other hand they have not received approval within the desired timeframe, and as the minister has requested further information, and SBM have indicated this will take some months for them to provide, it suggests that the process has hit a speed hump at the very least and in any case they have said (in that announcement) that they now will have to shut down Touquoy in early FY24 (which starts on July 1st, just 6 weeks away). They are also getting a lot of pushback from environmental groups and local residents over the proposed Beaver Dam gold mine, and SBM have today announced that their plan is now to shelve those plans for Beaver Dam and concentrate on developing their other assets in Nova Scotia.

I'm not particularly interested in owning shares in a gold miner who ONLY owns Atlantic, Simberi and some shares in other gold miners, and I intend to sell. However, I think I should get a better exit price than where SBM closed today (down -5.43% at 61 cents/share).

The thing is - I've just read Claude Walker's very frank self-examination on his failure to promptly offload all of his Eroad (ERD) at over $4/share - My Biggest Investing Mistake of 2022 - A Rich Life - after he realised his investment thesis was busted - and it has certainly occurred to me this evening that I'm about to make a similar mistake by not selling all of my SBM shares tomorrow.

However, while I can understand the market selling down SBM by -5.43% today and bidding GMD up +10% (closed at $1.21, up +11c) - because GMD are going to come out of this as a far better company with a much stronger future and SBM are going to come out of this as a smaller company but having avoided going broke or becoming even smaller than they are going to become as a result of this transaction - I also still see upside in SBM at 61c/share. Here are a couple of the positives for SBM (and they're reasonably hard to find amongst all of the negatives):

1. The revised Transaction will result in St Barbara shareholders collectively having economic exposure of up to ~19.5% of Genesis post acquisition (15.2% excluding contingent consideration).
2. The Transaction will enable St Barbara to extinguish all senior debt and lease liabilities, and will hold a pro-forma cash balance of approximately $197 million.
3. It is anticipated that St Barbara’s shareholding in Genesis (excluding the contingent consideration) will be substantially, if not fully, distributed to St Barbara shareholders via a return of capital post Transaction.

And that will leave SBM as the debt-free and cashed-up owners of:

• The Atlantic operations, Nova Scotia (Canada), comprising 1.9Moz in Mineral Resources and 1.5Moz in Ore Reserves;
• The Simberi operations, Papua New Guinea, comprising 4.0Moz in Mineral Resources and 2.0Moz in Ore Reserves;
• 12.7 million shares in ASX-listed Catalyst Metals Limited, with a market value of $12.8 million*;
• 158.1 million shares in ASX-listed Kin Mining NL, with a market value of $7.0 million*;
• 41.5 million shares in ASX-listed Peel Mining Limited, with a market value of $5.8 million*;
• Pinjin exploration joint venture interest in Western Australia;
• Select exploration tenements outside Western Australia (including Back Creek in NSW); and
• A number of other royalty interests over mining and exploration assets. 

*based on the Catalyst Metals, Kin Mining and Peel Mining closing share prices on Friday (14th April 2023).

I don't expect to remain a St Barbara shareholder long enough to see the following come to fruition however St Barbara’s say their strategic focus post Transaction will include:

1. Corporate

• Establish a refreshed corporate culture and identity focused on value;
• Actively manage the investment portfolio; and
• Exploration of Back Creek (NSW) project.

2. Atlantic

• Prioritise development of Fifteen Mile Stream and target development in FY26;
• Investigate the repurposing of the Touquoy plant for use at Fifteen Mile Stream;
• Complete processing of stockpiles at Touquoy by end of 2024;
• Pause permitting process for Beaver Dam; and
• Continue exploration at Cochrane Hill, Mooseland, South-West and Goldboro East.

3. Simberi

• Extend oxide production through FY25 and into FY26;
• Sulphides Mineral Resource and Ore Reserve extension drilling;
• Revisit Sulphides Expansion development plan by FY26; and
• Prepare for investment decision with Mining Lease renewal by FY28.

So those future plans don't fill me with confidence. It now seems obvious that the market was correct with their initial reaction to Bob Vassie buying Atlantic Gold in mid-2019 for C$722 million (A$536 million), i.e. that it was a mistake, or at the very least that SBM was paying too much for Atlantic and that the expected benefits the acquisition was supposed to provide to St Barbara were likely being overstated at the time (including the expected "synergies"). Bob retired from frontline management soon after that (although he is now the Chairman of the Board of Ramelius Resources - RMS), and Craig Jetson presided over a series of dissapointing updates and guidance downgrades over the next 3 or so years, which included a number of issues at Gwalia, SBM's flagship high-margin, high-grade gold mine at Leonora in WA. And then Craig quitely slipped away just before the announcement that Genesis Minerals and St Barbara would merge, with Genesis Minerals shareholders clearly getting the better end of the deal despite Genesis not yet having a single operating gold mine. The new CEO and MD of St Barbara, Daniel (Dan) Lougher (ex-CEO & MD of Western Areas, a nickel miner, for a decade), has been very quiet, and was happy enough to step back from frontline management into a board position (non-executive director of both Hoover House and Phoenician Metals) with Raleigh Finlayson planned to become the MD of Hoover House and SBM's Chief Development Officer, Andrew Strelein, set to become the MD of the proposed demerged entity, Phoenician Metals. Of course that's all been scrapped now - there will be no Hoover House and there will be no Phoenician Metals. St Barbara will have to try to rise from the ashes using their old name (St Barbara), without the Phoenix reference.

So, while I used to rate Bob Vassie highly as a quality gold mine manager, and he certainly did turn St Barbara around in his time there, it all went pear-shaped starting from the time he retired, or a little before actually, and his decision to pay A$536m for Atlantic before he retired hasn't helped at all. It may have seemed like a genius move if everything had worked out as they indicated in the presentation at the time (in May 2019) that they expected it to, but it didn't work out that way at all, and they haven't followed through with the "Simberi Sulphide" project in PNG that Bob was clearly backing before he left, and Gwalia has had its issues as well. So SBM has turned into a basket case really.

But I'm not going to sell out tomorrow. I think SBM's share price could go lower still in the near term, but I think I'll get out for closer to $1/share than 60c/share whether through a combination of that intended capital return and then a share sale, or just a share sale. One thing is certain, I'm going to be booking a capital loss at some stage. I'm not going to breakeven on this one. But around 60 cps is too low for what they are going to be after this transaction goes through.

Of course, the downside is if this transaction does NOT go through, and nobody else offers to buy Gwalia and SBM's other Leonora assets for around $600m, and then St Barbara do indeed breach one or more of their Banking Covenants (interest cover ratio) on June 30th and their lenders call in that debt...

However, I'm thinking this transaction will go through. In fact, I'm counting on it.

But I'm not buying any more SBM, not tomorrow, and not even if they go down to 30c/share. I've poured more than enough already into them.

I reserve the right to sell my virtual Strawman.com SBM shares and my real-life SBM shares (held in two of my real life portfolios, one being my SMSF) at any time, but I don't currently intend to sell them this week.

Further Reading:

St Barbara’s disastrous Atlantic Gold takeover threatens Genesis Minerals and Hoover House deal (afr.com) (March 2nd 2023)

St Barbara ASX: gold miner’s share price plunges after big loss (afr.com) (February 22nd 2023)

St Barbara, Genesis Minerals recut deal, eyes on overseas assets (afr.com) (April 16th 2023)

Genesis Minerals raising $450m to buy St Barbara (afr.com) (April 14th 2023)

AustralianSuper backs Genesis in play for St Barbara gold mine Gwalia (afr.com) (Today, April 17th 2023)

AustralianSuper backs Genesis-led goldfields consolidation play

by Peter Ker and Elouise Fowler (Apr 17, 2023 – 1.18pm)

AustralianSuper will help mining executive Raleigh Finlayson consolidate the gold district around his childhood home in Western Australia under a revised $600 million deal with struggling miner St Barbara.

St Barbara will sell its flagship Gwalia mine to Genesis in exchange for $370 million of cash and a shareholding in the latter company that will be somewhere between 15 per cent and 19.9 per cent, as flagged by The Australian Financial Review’s Street Talk column on Monday.

Raleigh Finlayson is the chief executive of Genesis, and has secured the backing of AustralianSuper as he consolidated the West Australian gold mining sector. Bloomberg

Genesis will seek $470 million to fund the deal, with AustralianSuper, the country’s largest superannuation fund, putting in $210 million.

Genesis shareholders, a group understood to include billionaire businessman Kerry Stokes, will be asked to approve $400 million of the raising, which is a critical enabler of the deal given neither company was on track to generate meaningful cashflow in the year to June.

Substantial investment in the assets of the two companies will also be required if they are to achieve their potential.

That is particularly the case for the two assets that St Barbara will retain after selling Gwalia: Papua New Guinea’s Simberi mine and the Atlantic Gold business in Nova Scotia, Canada.

The Canadian assets look set to be idled as St Barbara seeks permits for a sustainable restart, and the process of temporarily shutting the Canadian division will require St Barbara to stump up close to $78 million of environmental guarantees to local regulators.

‘Sensible, regional consolidation’

St Barbara had only $40 million of cash on hand at March 31, suggesting it would have struggled to afford closure of its Canadian mines, let alone invest in their future, putting it at the mercy of Genesis’ cashed up supporters.

Aside from AustralianSuper’s pivotal role, Resource Capital Funds has pledged $90 million towards the raising, and Genesis said other institutional investors were also on board.

“Investors are demanding sensible, regional consolidation,” Mr Finlayson said, a reference to his plan to unify the fragmented goldfields around the town of Leonora.

Monday’s proposal replaces a previous merger deal struck by Genesis and St Barbara in December, which ceased to be viable when St Barbara revealed two batches of bad news about its assets in the past two months.

Mr Finlayson has vowed to revive Gwalia by first combining it with Genesis’ undeveloped gold resources about 30 kilometres away, as well as other gold mining and milling assets near Leonora.

Aside from its own gold discovery at Ulysses, Genesis now controls the marginal and idled Mt Morgans mine and a mill in Leonora district after buying more than 80 per cent of ASX-listed producer Dacian.

Mr Finlayson’s plan to consolidate the Leonora district suggests other nearby miners such as Red5 could be on the acquisition menu.

AustralianSuper’s pivotal role in Genesis’ consolidation of the district is no surprise to those at last year’s Diggers & Dealers conference in Kalgoorlie, where Mr Finlayson included in his presentation a photo of AustralianSuper’s mining-focused fund manager, Luke Smith.

Mr Smith was pictured holding a Genesis slide pack in one hand and an old slide pack in the other hand published by Mr Finlayson’s previous gold mining company, Saracen Minerals.

But the inclusion of Mr Smith in the presentation came with a serious message; unlike the established miners in the Leonora district, pre-revenue Genesis was going to be backed by serious institutional players.

“A lot of these companies [mining gold near Leonora] aren’t strongly owned by institutional shareholders and that’s where the real value-add can happen,” Mr Finlayson said in the presentation.

St Barbara expects to have about $122 million of unrestricted cash on its balance sheet after the sale of Gwalia, the funding of the Canadian environment guarantees and clearing of other debts.

Fall from grace

That should give St Barbara sufficient funds to start fresh with its two struggling assets in Canada and PNG, but its future won’t be entirely funded; Simberi requires close to $200 million of investment in new processing equipment to handle the mine’s shift into a different type of gold-bearing geology sometime this decade.

That money may not need to be spent if Simberi were owned by the same company that owns the nearby Lihir mine; now Newcrest Mining.

The revised deal extends the stunning fall from grace for St Barbara, which five years ago ranked among Australia’s top five gold miners by market capitalisation. At its peak, in 2017, Gwalia generated net cash flows – after spending on growth and maintenance – of $231 million.

But Gwalia’s performance has stuttered multiple times since then, hit by blow outs on installation of ventilation infrastructure, poor ground conditions, poor blasting work and differences with a key contractor.

Gwalia is on track to generate barely $20 million of cashflow in the 12 months ending June 30 after spending on growth capital.

Baker Steel managing partner David Baker holds St Barbara shares and said there was “logic in the deal” proposed on Monday.

“Genesis have got a bit more of a track record on managing assets in Western Australia. They have a proven track record and did well with Saracen, and so I think he’s [Finlayson] worth backing to basically resolve this and take some pressure off Gwalia,” he said.

“The fact is that money was going to have to go into this asset [St Barbara], and do I really want to give the St Barbara management that money when they’ve shown that Gwalia is a tough asset for them?

“So I’d argue that someone else has come up with a better strategy and arguably I’d better back those instead of St Barbara management, to be honest.”

Gold has been mined at Gwalia for more than 120 years, and St Barbara had sought to complement its ageing flagship by spending $768 million on the Canadian assets of Atlantic Gold in 2019.

But St Barbara struggled to win the trust of environmental regulators and First Nations people in Nova Scotia, and as a result struggled to secure permits for its plan to sequentially develop four adjacent gold mines in the province which would share infrastructure.

Tim Netscher, the St Barbara chairman who oversaw the 2019 acquisition, said as recently as August he believed Atlantic would generate returns for shareholders eventually. On Monday, it was revealed Mr Netscher would not take up the opportunity to put right the disastrous Atlantic acquisition; he will retire from the St Barbara board next week.

Mr Netscher will be succeeded by lawyer Kerry Gleeson, another of the St Barbara directors that oversaw the Atlantic acquisition.

Mr Baker said St Barbara’s Canadian and PNG assets may now be better funded.

“I still get exposure to the offshore assets. They’re probably better capitalised now. Often it’s the vehicle that gets thrown out with the bathwater that often outperforms going forward and this could be the case with the new St Barbara,” he said.

St Barbara does not intend to be a long-term holder of the Genesis shares it will receive under Monday’s deal. St Barbara said the value of those shares would be “substantially, if not fully” returned to St Barbara shareholders “via a return of capital” once the deal was completed.

That comment was based on the proviso that Genesis shares remain close to the $1.15 per share level at which it will raise the $470 million.

--- ends ---

Note: Genesis closed up 10% today at $1.21.

Today's Announcements:

SBM-Sale-of-Leonora-Assets-to-Genesis-Minerals.PDF (5 pages)

SBM-Presentation-on-Sale-of-Leonora-Assets-to-Genesis-Minerals.PDF (18 pages)

GMD-A-new-gold-leader-100-focused-on-Leonora.PDF (4 pages)

GMD-Presentation---Acquisition-of-St-Barbara's-Leonora-Assets.PDF (44 pages)

GMD-Reporting-on-St-Barbara's-Leonora-projects.PDF (36 pages)

Thanks Bear,

That's super helpful.

So, essentially, SBM took on some leverage by buying assets that had substantial development requirements. At the time this looked quite feasible as the share price was high and operating mines were profitable. The operating mines have since had a large number of downgrades, making funding and putting them in a spot where they are at the mercy of people with money.

Weirdly, the gold price is at $2000 USD and this still isn't helping them out of their misery. Yuk.

Okay, so looking back, at what point would it have been reasonable to work out that things were going to go this badly and to get out?

A number of market participants made that call back in 2019 when SBM bought Atlantic @Hackofalltrades - as Atlantic only had one operating mine (Touquoy) and 3 more projects at various stages of development that were all planned to come online consecutively over the next 5 or 6 years. However, a number of things needed to go right for them for that to happen, mostly permitting, which hasn't happened. There have been a number of downgrades and issues since then, and I didn't consider any of those to be thesis breakers at the time, but when looked at together as a whole, it's not a company that has lived up to its promise and potential over the past 4 years. I think this is a good example of where a thesis needed to include, "What would make me sell" in it, so trigger points were clear and could be acted upon if they occurred.

I struggle to pick one single point in that 4 years where I should have sold, but I'm sure there are plenty of other people who would say there were a number of those.

To be clear, I could see that things were going badly. Even Blind Freddy could see that. However, the issues were always described as temporary and SHOULD have been rectified given time. So the thesis was that the gold was still there and the company just needed more time to extract it profitably. However these issues at Atlantic in Canada have triggered these EPB's (Environmental Performance Bonds) which are apparently set to increase and require further bank backing at a time when SBM is experienced a cashflow crunch due to issues at its operating gold mines. So the biggest red flag was clearly waved yesterday with this revelation. That said, I still think that the company is worth more than 60 cents per share, IF they can survive the next six months.