By Marcus Falck and Edvard Bruu (Stockholm School of Economics), Christopher Gvenetadze and Alessandro Carleo (Bocconi University) | 12/04/2020
Overview of the Deal
Acquirer: Endeavour Mining Corporation
Target: SEMAFO Inc.
Estimated value: CAD 1.10bn (ca. USD 690m)
Announcement date: 23rd March 2020
Acquirer Advisors: BMO Capital Markets, Gleacher Shacklock
Target Advisors: Maxit Capital LP, National Bank Financial Inc.
Endeavour Mining Corp announced the acquisition of SEMAFO Inc for CAD 1,102.71M (ca. USD 690m). The transaction was announced on March 23, 2020 and is expected to be completed by June 30, 2020.
For the past several years, Endeavour and SEMAFO have worked as industry partners to consider shared issues common to companies operating in West Africa. In early 2019, both companies engaged in a mutual dialogue in order to evaluate the merits of a business combination. The dialogue included extensive mutual due diligence as well as discussion of potential terms of a transaction, with a final proposal in May 2019. At that time, it was not possible to agree on terms that appropriately shared the risks and rewards of a combination.
In early 2020, discussions between Endeavour and SEMAFO recommenced. Endeavour’s management team completed on-site due diligence at SEMAFO’s operations in Burkina Faso during February 2020, including a comprehensive assessment of security, operations and exploration. Both companies also re-opened data rooms for mutual confirmatory due diligence, including visits and, following collaborative discussions, confirmed their shared strategic vision and desire to complete a combination subject to negotiation of agreeable terms. Negotiations proceeded, culminating in agreement on the terms of the Transaction detailed in this announcement. The deal rationale includes, among other things, the creation of a top 15 global gold producer with +1 million ounces of gold production per year and the creation of a leading West African gold producer with six operations and an attractive growth pipeline.
In terms of deal structuring, the agreement will lead to an exchanging ratio of 0.1422x representing a 27.2% premium to the 20-day VWAP for SEMAFO and is accretive on all metrics to Endeavour. Therefore, Semafo shareholders will receive 0.1422 of an Endeavour share for each Semafo share they hold. Existing Endeavour and Semafo shareholders will own approximately 70% and 30%, respectively, of the combined company.
“This transaction has received strong support from our key shareholders who recognize it as an exciting value creating opportunity to bring together two companies with common values and share culture built on decades of successful West African experience” - SEMAFO president and CEO Benoit Desormeaux
Company Details (Acquirer: Endeavour Mining Corp.)
Endeavour Mining Corporation is a gold mining company. The Company engages in gold mine production, development and exploration activities in West Africa. The firm operates mining projects located in Mali, Burkina Faso, and Cote d'Ivoire.
Founded in: 1988
Headquarters: George Town, Cayman Islands
CEO: Sébastien De Montessus
No. of employees: ca. 1000
Market cap: USD 1.68bn
EV: USD 2.32bn
LTM Revenue: USD 886.40m
LTM EBITDA: USD 223.80m
LTM EV/Revenue: 2.62x
LTM EV/EBITDA: 10.36x
Company Details (Target: SEMAFO Inc.)
SEMAFO is a Canadian-based mining company with gold production and exploration activities in West Africa as well. SEMAFO currently operates the Mana Mine in Burkina Faso, the Samira Hill Mine in Niger, and the Kiniero Mine in Guinea. Therefore, the company engages mainly in activities in West Africa, too.
Founded in: 1994
Headquarters: Saint-Laurent, Montreal, Canada
CEO: Benoit Desormeaux
No. of employees: ca. 1235
Market cap: USD 712.50m
EV: USD 751.40m
LTM Revenue: USD 475.80m
LTM EBITDA: USD 262.80m
LTM EV/Revenue: 1.58x
LTM EV/EBITDA: 2.96x
Projections and Assumptions
The merger of Endeavour and Semafo implicates several profitable synergies for both companies, one of the most prominent being an enhanced ability to manage risk. With both companies having their operations concentrated to a few mines dispersed throughout the West African region, the financial effects of operational issues or interruption in one of the mines are enormous for the individual companies. Such scenarios are becoming increasingly likely with a rise of Islamist violence in the area. As recently as in November of 2019 a convoy from Semafo was attacked by an Islamist group, forcing the company to completely suspend the operation at its Boungou mine. The merger diversifies the joint company’s revenue streams by reducing its dependency on any single mine, while also enabling improved security measures through the company’s large scale network in the region, reducing the risk of such an occurrence.
Furthermore, the combined entity of Endeavour and Semafo will have an improved capital market profile as a result of the merger. Through its developed cash flow profile and stronger joint balance sheet, the company is able to meet the investment requirements of larger funds, hence strengthening its future financing options. This in conjunction with the entity’s extensive expertise in the industry through the combination of the management teams, allows the company to further expand its operations in the region. Therefore strengthening its position as the largest gold mining corporation in West Africa.
Long Term Upsides
Equal to many M&A-transactions, the merger of Endeavour and Semafo enables economies of scale in the joint company’s operations. By joining their forces, the company is able to increase its focus on investments into automation and larger capacity equipment in order to reduce the extraction cost per ounce of gold. Investments that would most likely not be possible as separate, independent entities. Furthermore, previous mergers in the industry indicate that there are also economies of scale when it comes to the transportation, processing, and distribution of the extracted gold. This could further lower the joint company’s cost base in relation to the generated revenue.
Finally, the merger of the two mining companies could also prove to be beneficial when it comes to its public policy work in the region. The joint company can leverage its size and its established relationships to become the preferred partner for key stakeholders and local governments. This in combination with the increased funding opportunities of the joint company, that were previously mentioned, paves the way for successful, continued expansion efforts in the region. Increased public policy presence could also prove to be advantageous when it comes to regulatory risks. The company can leverage its importance to the region in order to influence or halt regulation that will potentially impact its mining operations negatively.
Risks and Uncertainties
The news of the merger provides some distraction from the stream of downbeat headlines regarding temporary mine curtailments and closures in the wake of the COVID-19 pandemic. Endeavour CEO De Montessus said that operations would certainly continue. However, he admitted that they still have to figure out a plan that would allow them to produce in a locked down environment in case of a further spread of the virus. A few companies have already taken greater caution. Lundin Gold Inc. announced Sunday the shutdown of its mine in Ecuador over rising concerns in recent days. On Monday, Vancouver- based B2Gold Corp. announced it halted its mining operations in the Philippines because government restrictions aimed at stopping the spread of coronavirus caused a temporary fuel shortage.
Although mining shares have plummeted due to the coronavirus pandemic slowing the world economy and bruising financial markets, deal-making could be fostered since companies mostly trade at a discount making them attractive for potential acquirers. Commenting on the timing of the transaction, De Montessus said it was “perfect” as both companies had recently completed capital intensive projects and expected to generate cash.
However, to assess the risks and uncertainties from a higher perspective, Africa’s whole Mining Industry needs to be considered, which operates in an uncertain continent. The industry is buffeted by problems regarding retrenchments, unemployment, low productivity, rising costs, volatile exchange rates, commodity prices and government regulations. While certain risks have been reduced, others have increased in importance. The major external risk facing Gold Fields is the volatility of the gold price.
The Gold Council (the market development organisation for the gold industry) expects that investor positioning will likely influence gold’s performance in the near term. But over the medium term, broader financial and geopolitical uncertainty and developments in monetary policy will play a more important role.
For example, the Council analysed the performance as implied by four different hypothetical macroeconomic scenarios provided by Oxford Economics.
a global deceleration
a US-led recession
a more pronounced slowdown in China
an economic improvement in emerging markets
While most of these scenarios will lead to a decrease in demand, we need to consider the fact that such a decrease would probably be offset by an increase in investment demand on the back of lower interest rates and loosened credit conditions.