Acacia Mining and Endeavour merger could be “compelling” – analyst

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By Guest Writer on January 16, 2017. No Comments

The proposed combination of Acacia Mining Plc (LON:ACA) and Endeavour Mining Corp (TSE:EDV) is a “compelling opportunity”, according to analysts at Deutsche Bank.

Discussions were confirmed on Friday 13 January 2017 afternoon after the market in London had closed.

In a brief regulatory statement, Acacia said that it was in discussions over a ‘strategic combination’ but there were no other details.

“We believe this merger would make sense, add value, and create capex synergies,” says Deutsche Bank analyst Franck Nganou.

He highlights that the new company would be “a champion” of African gold mining with production in the order of 1.5mln ounces a year – which would eclipse that of Randgold, currently London’s biggest producer of gold – at an estimated cost of US$900 per ounce, putting it on the third quartile on the cost curve.

“It would also improve Acacia’s liquidity position, and speed up its geographic diversification efforts,” the analyst added.

Nganou notes that it wouldn’t quite be a merger of equals, with Acacia valued at US$2.2bn versus Endeavour’s US$1.7bn, but he reckons there’s a strong case to be made for a merger to proceed.

Whilst waiting for a deal to be revealed, Deutsche rates Acacia as a ‘buy’ and presently it has a 550p price target which suggests some 28% upside to the current price of around 427p.

Elsewhere, Yuen Low, an analyst at Shore Capital, said a deal would be of benefit to Acacia but there is no assurance it will happen.

“Indeed, the rather more dynamic Endeavour stressed that its strategic focus was on organic prospects within its existing asset portfolio, although it ‘routinely evaluates business opportunities.”’

African gold mining champion

Acacia, the former African Barrick Gold, has its production base solely in Tanzania and after some operational difficulties has been recovering strongly.

Endeavour has mines in Mali and Ghana and the Hounde belt in Burkina Faso, where Acacia has just started to explore.

So from that end, Endeavour would be a desirable geographic diversification for Acacia, said Low.

Acacia forecast production of more than 800,000 ounces of gold in 2016, while Endeavour is expected to produce around 600,000 ounces but it wants to boost this by 50% by 2020.

Canadian giant Barrick Gold (TSX:ABX) is Acacia’s majority owner with a 64% stake but has made no secret of its desire to cut or even sell its holding.

A deal would likely be engineered through a takeover of Endeavour by Acacia, reports over the weekend suggested, which would reduce Barrick’s stake to under 30% and eventually allow it to dispose of the rest more easily.

Acacia shares were up 11p at 429p valuing it at £1.78bn, while Endeavour is worth C$2.1bn (£1.33bn).