Gold Fields, a South African mining company, is contemplating a new bid for Northern Star Resources after the Australian miner rejected its $27bn takeover offer. The rejected proposal, valued at A$38.7bn ($27.1bn), was a combination of shares and cash. The potential deal would create the world's second-biggest gold miner. According to Gold Fields' CEO Mike Fraser, the company will be disciplined in pursuing this opportunity.
The rejected offer was unsolicited, and Northern Star Resources saw strong merit in combining with Gold Fields. However, investors expect Gold Fields to improve its offer, likely with more cash, as issuing additional shares would dilute cash flow per share. A Gold Fields spokesperson stated that a recent Australian road show was planned before the takeover offer was disclosed. The road show aimed to familiarize Australian investors with Gold Fields' assets.
Investors find it challenging to assess the value of Gold Fields' largely scrip offer due to limited knowledge of the South African miner's operations in Australia. Gold Fields' shares trade at an enterprise multiple of 3.5 to 4 times earnings before interest, tax, depreciation, and amortisation, which is much cheaper than Northern Star's multiple of 7 to 8 times. However, Gold Fields' five-year average free cash flow yield is 6.9%, significantly higher than Northern Star's 3.1%.
The valuation gap between Gold Fields and Northern Star Resources is expected to widen in the next 12 months. Northern Star is set to increase output at its Kalgoorlie operations in Western Australia, yielding more free cash flow. A fund manager stated that convincing shareholders to accept shares might be easier than an all-cash offer. However, the fund manager also noted that Gold Fields needs to secure a deal soon, or Northern Star will become too expensive.
Northern Star Resources' new CEO, Suresh Vadnagra, faces a challenging situation in convincing shareholders that Gold Fields' offer undervalues the company. Barrenjoey analyst Dan Morgan described Vadnagra's situation as a "baptism of fire." Northern Star's shares rallied as much as 9% after the rejection, reflecting expectations that Gold Fields will not give up. The company's shares closed up 6.3% at A$24.77.
Investors are awaiting details on the $4bn-$5bn of corporate, operational, and portfolio optimisation synergies that Gold Fields expects to extract from the deal. Most of the cost savings appear to stem from paying less tax on the combined operations. Operational synergies centre on two clusters of assets in Western Australia, including Northern Star's Thunderbox mine and Gold Fields' nearby Agnew operation.
A potential obstacle to the deal is that generalist investors may prefer a combined company domiciled in Australia, given that about 70% of revenue would originate there. Gold Fields has offered a secondary listing in Australia and stated that the combined company would be a truly global business with listings in Australia, the US, and South Africa. The possibility of a rival bidder emerging also exists, as Northern Star's chair, Michael Chaney, mentioned receiving approaches from multiple companies in June.
Key points
- Gold Fields may improve its offer with more cash.
- Northern Star Resources' valuation is expected to increase.
- The deal's success may depend on the company's listing location.
