OceanaGold (TSX: OGC; ASX: OGC) is offering to buy Romarco Minerals (TSX: R) in a friendly all-share, $856-million deal to secure low-cost growth in the form of the junior’s Haile gold mine, which is under construction in South Carolina.
“This transaction further cements Oceana’s position as the lowest-cost gold producer. Once Haile is in production, Oceana would be further insulated from the volatility of the precious metals markets by operating two long-life, low-cost assets,” OceanaGold’s CEO Michael Wilkes said on a conference call.
The other “low-cost” asset OceanaGold has is the Didipio gold-copper mine on Luzon Island in the Philippines. Didipio boasted all-in sustaining costs of US$318 per oz. gold, minus copper credits, during the first half of 2015. The mine should run until 2030.
OceanaGold also operates the aging Macraes and Reefton gold mines on New Zealand’s South Island. The two operations had all-in sustaining costs of US$989 per oz. in the first half of 2015. They could both wind down by 2018.
Wilkes notes his team has looked for acquisitions ever since they commissioned Didipio in 2013. Earlier this year, OceanaGold spent US$101 million for Newmont Mining’s (NYSE: NEM) Waihi gold mine on New Zealand’s North Island, and invested $16.2 million for a 14.9% stake in Nevada explorer Gold Standard Ventures (TSXV: GSV; NYSE-MKT: GSV).
“While we feel that we have a top-notch operating portfolio in the history of execution, we would like to have another tier-one development asset, or in short, another Didipio,” Wilkes explained.
Romarco anticipates production could start at the Haile open-pit mine in late 2016. It has spent US$63 million of the mine’s US$333-million start-up capital during this year’s first quarter.
Haile’s annual production in the first decade of its 14-year life should average 148,000 oz. gold and 185,000 oz. silver. Estimated gold production during 2017 is 172,000 oz. at all-in sustaining costs of US$414 per oz., net of silver credits.
The addition of Haile should bring the enlarged company’s 2017 gold output to 540,000 oz. at all-in sustaining costs of US$533 per oz. About 75% of those ounces would come from New Zealand and the U.S., with the latter country becoming OceanaGold’s third operating platform, Wilkes says.
Under the offer, Romarco shareholders will receive 0.241 of an OceanaGold share for each share held. This values each Romarco share at 68¢ — a 73% premium over the junior’s July 29 close.
Along with the hefty premium, Romarco shareholders would benefit from exposure to OceanaGold’s diverse portfolio, enhanced financial position, and its mine development and operating expertise.
“Their expertise — combined with ours — makes a very, very powerful combination for our two companies,” Romarco CEO Diane Garrett said on the call.
Despite the transaction, Garrett assured business at Haile would continue as usual.
OceanaGold anticipates keeping the local management team and all the employees at the Haile mine.
The proposed transaction could close by October. OceanaGold and Romarco shareholders would then own 51% and 49% of the combined entity.
The new firm would have an estimated US$1.7-billion market capitalization and US$317 million in cash and short-term investments, plus US$260 million in debt.
“I believe that the new OceanaGold will be quite simply the best intermediate gold company on the planet,” Wilkes said.
Paradigm Capital analyst Chris Chang writes that OceanaGold’s offer is “pretty fully valued,” and says the “likelihood of a competing bid is low.”
However, BMO analyst Brian Quast says he’s “reluctant to rule out a competing bid for what is one of the better, larger, politically stable development projects in the world.”
If Romarco walks away from Oceana, it would have to pay a $34-million termination fee.
OceanaGold closed July 30 down 19% at $2.28 per share, while Romarco shares rose 32% to 52¢.