Two of Vancouver’s top gold mining financiers – Ross Beaty and Frank Giustra – are combining forces and merging their respective mining companies into one.
Beaty’s Equinox Gold (TSX,NYSE:EQX) plans to acquire Giustra’s Leagold Mining Corp. (TSX:LMC, OTCQX:LMCNF) in a US$670 million deal, although the transaction is being described as a merger of equals.
Beaty will remain as Equinox’s chairman. Giustra, who is Leagold’s chairman, will will step aside to focus on his various philanthropic endeavours, but will remain a shareholder.
“The combination of Leagold and Equinox Gold will deliver on a promise we made to our shareholders when we launched Leagold three years ago: to create a major gold producer in short time frame in anticipation of a new phase to the gold bull market that started in 2001,” Giustra said in a press release.
As part of the deal, Beaty will make a US$40 million private placement to maintain a 9% share in Equinox.
With a market cap of $929 million, Equinox is the larger of the two companies, on a market cap basis, although it has only two gold mines currently in operation, with a third expected to be in production by the third quarter of 2020. Leagold’s market cap is $767 million; the company has four operating mines.
While the market may view the transaction as a takeover of a smaller company by a larger one, Rick Rule, CEO of Sprott Holdings Inc., said it really should be viewed as a merger of equals.
“I think some Lea shareholders were hoping they’d get a cash offer from somebody,” Rule said. “So in the shorter-term there could be some weaknesses, but over the 12- to 18-month time frame, I think this is an extremely strong merger. I think that the market will reward this merger handily.
“In the first instance, it reduces the combined G&A (general and administrative expense) relative to assets under management,” Rule said. “It also gives the successor team greater scope to make investment decisions.
“If you’re looking to optimize capital allocation amongst seven or eight assets, you can, just arithmetically, have a better choice of opportunities for return on capital employed than if you are allocating among two assets.”
Post merger, Equinox will own six operating mines in the U.S., Mexico and Brazil, with an anticipated production of 700,000 ounces of gold per year in 2020. It will add a seventh mine when its Castle Mountain gold mine in California goes into operation, sometime around the third quarter of 2020, which is expected to bring Equinox's gold production up to 1 million ounces by 2021.
Both Beaty and Giustra had gotten out of gold mining for several years to invest in other sectors – renewable energy in Beaty’s case, with Alterra Power, and film in Giustra’s case, with Lion’s Gate Films. But both signaled their plans to return to the gold space about three years ago with the formation of new gold mining companies.
“For myself, I like to follow trends and cycles,” Beaty told Business in Vancouver. “Back around 2015, I looked at the gold market and I thought it was ripe for a rise in price over the long-term. The market had gone from a bear market to what I thought was going to be an imminent bull market and that’s exactly what happened.”
In 2017, Beaty formed Equinox through a merger of three companies. Asked if more mergers and acquisitions may be on the horizon, Beaty suggested it was a distinct possibility.
“We will be focusing on value as much as size, but in this size of company, for sure it is a value creating exercise to get bigger,” he said. “There’s a certain point at which that has diminishing returns and focus should be on cash flow and earnings and that kind of thing.
“I think, right now, we’re maybe in the third or fourth inning of the bull market that’s going to see very, very significant movement over the next few years. And in that environment, building a gold company is a very happy experience because the bigger you are the more you benefit from the rise in the price.”
Rule said it makes sense for Beaty to stay on as chairman.
“Frank is more of an investor these days – investor, financier, promoter. Frank took a completely pragmatic, non egocentric look at things and decided, for this task, that Ross was the better man. And that shows an awful lot of leadership. This company is going to work, I suspect.”
The merger, which still must be approved by shareholders of both companies, is just the latest in a wave of mergers and acquisitions in the gold space – the largest being the merging of Goldcorp. and Newmont Mining into Newmont Goldcorp (TSX:NGT).