Equinox Gold closed an agreement to buy Canadian Orla Mining for around US$5.1 billion, in yet another move within the recent wave of mergers and acquisitions in the gold mining sector. Companies have been seeking to gain scale, increase production and reinforce reserves after a strong gold rally over the last year.
According to a statement released this Wednesday, payment will be made almost entirely in shares. With the transaction, Equinox will have two mines in operation in Mexico and Canada, as well as projects under development in Nevada (USA) and Panama. Production from the combined company is expected to reach 1.1 million ounces per year, with the potential to exceed 1.9 million ounces.
Gold broke a record price in January and, since then, has traded for most of the time above US$4,500 per ounce, which has encouraged new acquisitions in the sector. On the other hand, the strong recent volatility in metal prices makes investors more cautious about supporting operations that appear too expensive. This scenario has led to deals with little or no premium in relation to the screen price. The merger between Equinox and Orla follows this line, without offering a premium to Orla shareholders.
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Orla shares rose almost 1% in New York, but gave back part of the gains. Equinox shares fell by up to 7.3%.
The deal should create a company with an implied market value of around US$18.5 billion. The increase in scale opens up space for Equinox to position itself as a senior gold producer in North America, targeting large institutional investors, who typically prefer larger, more liquid names. The reinforcement comes at a time when gold is regaining space in portfolios as protection against currency devaluation and greater distrust in relation to fiat money.
Equinox has been reconfiguring its portfolio to focus more on North America and, last year, announced the sale of its operations in Brazil to CMOC Group, one of China’s largest mining companies, in a deal worth around US$1 billion.
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“The really positive thing here is that we keep it simple in terms of jurisdiction,” Equinox CEO Darren Hall said in a phone interview. “There are no major cost synergies in this transaction — it is much more of a complementary combination, which allows us to take advantage of the joint strength of operating in the same regions,” he stated.
While the deal is seen as positive for Equinox in the short term and creates a larger, Canadian-focused producer, there are still questions about the timing and thesis for the two companies, as both appeared well positioned to grow consistently on their own, TD Cowen analyst Wayne Lam wrote in a report on Wednesday.
The deal announced on Wednesday values Orla at approximately US$5.1 billion, based on the closing price of Equinox shares on Tuesday, according to Bloomberg calculations. Hall will be CEO of the merged company, while Simpson will take on the role of president.
The payment will be mostly in shares: each Orla shareholder will receive 1 Equinox share and a symbolic cash value of US$0.0001 per share, according to the statement. After the combination, current Equinox shareholders will own approximately 67% of the new company, and Orla shareholders will own approximately 33%.
BMO Capital Markets acted as financial advisor to Equinox, while Trinity Advisors Corp. and Scotiabank advised Orla.
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