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Elliott Management has called on Australia’s largest gold producer to resume negotiations with its potential suitor after the company rejected a A$39 billion ($27 billion) takeover offer from South Africa’s Gold Fields, which would create the world’s second-largest producer of the precious metal.
The future of Northern Star Resources has been uncertain since US hedge fund Elliott in June asked the Perth-based gold producer to put itself up for sale following a series of profit warnings.
Gold Fields, identified by Elliott as one of the only gold producers large enough to buy the company, has approached its rival several times in recent months.
Northern Star said on Monday it had rejected an offer from Gold Fields, one of the world’s largest gold producers and which already has significant operations in Australia, calling it “opportunistic, unsolicited and conditional”.
Northern Star shares gained 7 percent in Sydney, valuing the company at A$34 billion ($23.8 billion) – although the share price of around A$23.47 is still lower than the implied A$27 per share value of Gold Fields’ rejected bid.
John Pike, a partner at Elliott, urged Northern Star to enter into discussions with Gold Fields. “We believe there is immense value creation potential at Northern Star, and any transaction will need to take this into account,” he said in a statement.
“But others clearly see the value here too, and we believe the board has an obligation to engage with any serious buyer and fully evaluate the best route to realizing this potential.”
A tie-up with Gold Fields, which owns four of Australia’s largest gold mines, including Gruyere and Granny Smith, would be second in the world to Newmont.
It would also create Australia’s largest gold producer, with the country’s annual production of 2.4 million ounces. The combined company would produce almost 60 per cent of its gold from Western Australia.
The offer, which would have paid for 73 per cent of the offering in new Gold Fields shares, “materially undervalues” Northern Star’s assets, according to the Australian company’s board.
Northern Star said this would expose shareholders to “jurisdictional and operational risks that they are not exposed to today”, in reference to the listing of Gold Fields in Johannesburg. The South African company has announced plans to establish a listing in Sydney to allow Australian investors to trade its shares.
Gold Fields said in a statement that there was a “strong strategic rationale” for a tie-up with Northern Star to create “a world-class pure-play senior gold producer with a compelling growth profile”. He estimates potential synergies could reach $5 billion across the combined group and at least $4 billion in asset disposals.
Citi analyst Ephrem Ravi said the two companies owned six of Australia’s 15 largest gold miners by production, adding that valuation was the key issue to resolve as the Australian company traded at a much higher multiple than its suitor.
Bloomberg was the first to report the Gold Fields approach, made in recent weeks.
Michael Chaney, chairman of Northern Star, said the company was “looking to acquire one of the world’s largest gold holdings at a price well below what the board considers to be its fundamental value and at a very opportune time.”
JPMorgan and Bank of America are advising Gold Fields, which fought a fierce battle to acquire small Australian gold producer Gold Road Resources last year, while Northern Star is advised by Goldman Sachs..
Gold mining is one of the most important industries in Australia’s history and the country remains the world’s eighth largest producer.
Significant consolidation has taken place in recent years with Newmont’s A$29 billion takeover of Newcrest, one of the largest mining deals completed in the past decade. Northern Star and Gold Fields have been actively acquiring smaller players as organic growth and potentially lucrative new deposits have proven difficult to come by.
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