Centerra Gold announced agreement to acquire AuRico Metals

Andrey KozhokaruNovember 09, 2017

Centerra Gold announced the acquisition of AuRico Metals, which is the Canadian Company engaged in the development of gold and copper properties. Centerra offered CAD1.8 per share in cash to AuRico’s shareholders, which represents a 38% premium to the preceding day’s closing price.

According to the press release, Centerra will buy out all shares of AuRico Metals, paying CAD1.8 per share, which represents a 38% premium to the closing price on November 6. The payment will be made in cash. The total purchase price will amount to CAD310mn (or $244mn applying 1.273 USD/CAD exchange rate). Centerra will use cash ($352mn as of September 30) and $125mn of newly raised debt to finance the acquisition.

AuRico Metals is developing gold and copper Kemess property in Canada. AuRico’s portfolio includes feasibility-stage Kemess Underground project and preliminary economic evaluation level Kemess East project. The Company owns the infrastructure left after the completion of the Kemess South project. The projected lifetime of Kemess Underground and Kemess East is 12 years for each of the projects. According to the assessment conducted in 2016, the reserves of Kemess Underground are 1.9mn ounces of gold and about 270k tons of copper, which correspond to an average annual gold production of 106k ounces and copper production of 21.3k tons. According to preliminary data for May 2017, the estimated reserves of Kemess East are 1.7mn ounces of gold and about 450k tons of copper. Centerra Gold plans to launch the Kemess East project when approaching the completion of the Kemess Underground project. The permit application for the Kemess Underground project is anticipated in 2Q2018. The decision to start the necessary construction works will be taken at the end of 2018 - early 2019. Eventually, the launch of commercial production at the Kemess Underground project should take place in 2023. AuRico is receiving a number of royalties, which include 1.5% NSR royalty on the Young-Davidson mine and 2.0% royalty on the Fosterville mine, as well as other royalties on projects at different stages.

According to Centerra Gold, assets of AuRico located in one of the lowest-risk jurisdiction for the mining business. It is expected that this acquisition will have an accretive effect for shareholders in terms of NAV, reserves, and resources. Moreover, the acquisition can create operational and tax synergies with the Canadian project Mount Milligan. Kemess projects considered as a low risk, due to the necessary infrastructure, which worth over CAD1bn, is already in place, First Nations agreement was concluded and an environmental impact assessment was carried out.

The proposed acquisition will require the approval of 2/3 of shareholders of Aurico Metals and relevant permits of regulatory organizations. Shareholder’s meeting is scheduled for December 2017 and the deal is expected to close in January 2018.

Our opinion:

As positive factors of the planned acquisition, we highlight a steady cash flow from royalty payments and the further exploration potential of Kemess projects. Centerra Gold has a sufficient liquidity, 48% (as of September 30) of which represented by available credit facilities. The main undetermined factor with the presented positive result of the acquisition is the considerable delay of the actual start of production at Kemess projects. Despite the fact that the amount offered to the shareholders of Aurico Metals is not excessive for Centerra Gold, the factual result of this investment is unobservable in the nearest future. The timing distance of future cash flows implies a certain risk premium, which is primarily related to the alternative cost of the investment and realization prices for metals in the long-term perspective. We put our 12M TP under review.