VANCOUVER — Centerra Gold (TSX: CG; US-OTC: CAGDF) has been shopping for gold assets in Canada, and on July 5 the company found a fit in debt-heavy Thompson Creek Metals (TSX: TCM; US-OTC: TCPTF) and its Mount Milligan copper-gold mine, 145 km northwest of Prince George in central British Columbia.
The total transaction value is pegged at US$1.1 billion, but very little of it will end up in the hands of Thompson Creek shareholders. In fact, Centerra’s big expense will be outstanding bond obligations totalling nearly US$900 million.
Under the agreement, Thompson Creek shares will be exchanged for 0.0988 of a Centerra share, or a 33% premium based on the companies’ closing prices at the time of signing.
The offer values Thompson Creek at US$140 million, while existing shareholders would own 8% of the pro-forma company.
Centerra would finance the acquisition with US$460 million cash-on-hand, US$300 million in new credit facilities and a US$170-million equity issuance.
“Being able to acquire an asset that has the calibre and top-notch geography of Mount Milligan on an accretive basis in this market environment is definitely a unique opportunity,” Centerra president and CEO Scott Perry said during a conference call.
“Projects of this quality are rarely available, and it will allow us to create a leading intermediate gold producer with robust free cash flows. Geographically we will be much more balanced, and we estimate that half our net asset value will be domiciled in North America,” he added.
One of Centerra’s goals in acquiring a mine in Canada is lowering its geopolitical risk. The company’s current sole producing asset is the Kumtor gold mine in Kyrgyzstan, which provides strong cash flow but also generates severe political headaches.
In early June, the Kyrgyzstan government launched a criminal probe against the company, and barred several of its employees from leaving the country.
The government eventually granted Centerra two permits to keep Kumtor running throughout the second half, but the company’s stock continued to reflect extra political risk.
“The transaction limits our exposure to Kyrgyzstan, which is not viewed as a top-tier mining jurisdiction from a capital markets perspective, and we believe we’ll be well positioned for a re-rating moving forward,” Perry said. “Based on multiples we currently trade at a discount to our intermediate gold peer group, and the integration of a high-quality Canadian asset will serve us well in terms of reducing and re-balancing our overall geopolitical risk profile.”
The other obstacle Centerra is overcoming is a stream that has entitled Royal Gold (TSX: RGL; NASDAQ: RGLD) to 52.3% of the life-of-mine gold production at Mount Milligan, which turned the operation into more of a copper asset for its operator.
But Royal Gold has agreed to amend its stream to 35% of total gold production in return for 18.8% of total copper output.
Under the amended stream agreement, Centerra’s revenue split at Mount Milligan is expected to be 70% gold and 30% copper, assuming US$1,351 per oz. gold and US$2.21 per lb. copper. The mine should produce between 240,000 and 270,000 oz. gold, and 55 million and 65 million lb. copper in 2016.
Royal Gold may have agreed to the amendment for fear of losing the Mount Milligan stream entirely. Thompson Creek had been walking a fine line towards bankruptcy, which could have allowed any potential post-bankruptcy acquirer to avoid the original streaming agreement.
“We’ve essentially agreed with Royal Gold to lower the gold stream at Mount Milligan in exchange for a copper stream,” Perry said. “The renegotiation means we’re taking ownership of the mine as a heavily gold-weighted asset. The amendment is basically neutral to net asset value, so neither party will receive an impairment against their investment.”
If the bid goes through, Centerra expects its pro-forma annual gold production will jump to between 675,000 and 725,000 oz. gold at all-in sustaining costs ranging from US$850 to US$925 per oz. gold.
Perry also sees upside in Thompson Creek’s largely defunct molybdenum business unit, which includes the Endako integrated mine facility in B.C., the Thompson Creek mine in Idaho and the Langeloth metallurgical facility in Pennsylvania. Both mines are on care and maintenance, though the Langeloth toll-processing business is expected to “cover expenses.”
“We’ve retained the moly unit in this deal because it offers important optionality moving forward,” Perry said. “We see it running as an internally funded business, and suffice to say there is a lot of upside here if the market turns. We’ll look to bring that to fruition when we hit a better price cycle.”
Centerra shares have traded within a 52-week range of $5.51 to $8.67 per share, and fell 7%, or 53¢, after news of the deal, en route to $7.48 per share at press time. The company has 242 million shares outstanding for a $2-billion market capitalization.
Thompson Creek shares last traded at 73¢ within a 52-week range of 16¢ to 95¢. With 222.8 million shares outstanding, the market capitalization is $175 million.
Canaccord Genuity analyst Rahul Paul was not impressed by the terms of Centerra’s offer, and dropped his price target from $10 to $7.50 per share after the news.
“We see meaningful value in [Mount Milligan], however, we believe that the Royal Gold stream and the high levels of debt significantly limit the value to Centerra’s equity holders,” Paul wrote on July 6.
“In that regard, we are surprised that Centerra paid a premium to [Thompson Creek] equity and debt holders, and was not successful in renegotiating the [gold] stream further. A more prudent outcome, in our opinion, would have been to wait for bankruptcy proceedings or further restructuring of the debt and stream, which may have resulted in the asset being available for a more attractive price.”