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Gold begins to shine as dealmakers stir

by Paul Whitfield  |  Published January 25, 2013 at 9:34 AM
gold101211.gifThe start of 2013 has ushered in the first stirrings of M&A activity in the long-dormant gold sector, with shares in Russia-focused Polyus Gold International Ltd. this week joining Canada's Aurizon Mines Ltd. in posting double-digit gains on the back of potential takeovers.

The value of London-listed Polyus climbed about 11% over Thursday and Friday, after unconfirmed reports emerged that Russian billionaire Mikhail Prokhorov was preparing to sell his 37.8% stake in Russia's largest gold company. The sale, to unnamed investors, could be a precursor to a merger with fellow London-listed, Russia-focused gold producer Polymetal International plc, according to analysts.

"Could a merger with Polymetal be the next step? In our opinion, such a merger is the most likely scenario going forward," Credit Suisse AG analysts Semyon Mironov and Mikhail Priklonksy noted.

Combining Polymetal and Polyus would deliver synergies and "wider options for both organic growth and M&A", wrote UBS AG analysts, who recommended buying Polymetal shares because of the prospect of a takeover.

M&A was largely absent in the gold sector over 2012, despite many gold companies' valuations falling to near historic lows. Mining sector CEOs have blamed the lack of deals on tight debt markets and the failure of high-profile gold sector deals, like Kinross Gold Corp.'s $7.1 billion takeover of Red Back Mining Inc in 2010. That deal cost Kinross CEO Tye Burt his job after Kinross was forced to write down $2.49 billion of its investment, as the cost of developing operations ballooned due to competition for both skilled labor and equipment.

A merger of Polyus and Polymetal, which remains the subject of speculation, would mark a return to big-ticket gold deals. Polyus has a market capitalization of about £6.8 billion, while Polymetal is worth about £4.3 billion. The combined group would rank No. 5 amongst gold mining companies in terms of market capitalization, ahead of South Africa's AngloGold Ashanti Ltd. and behind Australia's Newcrest Mining Ltd.

Polyus said in September that Prokhorov's Onexim Holdings Ltd. was in talks with two potential buyers for its 37.8% stake. The U.K.'s Takeover Panel is studying Prokhorov's plans to sell his stake to see if the sale should trigger a mandatory takeover of Polyus, according to reports by Reuters and the Wall Street Journal. That investigation is likely to focus on whether the buyers are acting in concert, and whether they are linked to Polyus's 40.2% shareholder, Suleiman Kerimov.

The sharp increase in Polyus' valuation comes after shares in Canada's Aurizon Mines Ltd. jumped about 36% on Jan. 11, following a bid from Alamos Gold Inc. Aurizon has rejected Alamos' C$780 million ($784 million) cash-and-share offer as too low, pointing out that its pre-bid share price was a victim of the wider slump in gold-sector valuations.

Alamos on Thursday vowed to push ahead with its offer claiming that it has strong support from the target's shareholders. Aurizon shares closed Thursday at C$4.64, which is C$1.23 higher than their pre-bid price.

Polyus shares traded early afternoon Friday at 225 pence, up 6.4 pence, or 3%, on their Thursday close. Polymetal shares have gained about 5% since Thursday morning, and traded Friday at 1,112 pence, up 22 pence, or 2%, on their Thursday close. If the bid for Aurizon and the potential merger of Polyus and Polymetal are a signs of a wider return to gold-mining dealmaking, shareholders across the sector will have reason to cheer.

Tags: Aurizon Mines Ltd. | Mikhail Prokhorov | Onexim Holdings Ltd. | Polymetal International plc | Polyus Gold International Ltd.

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