viewResolute Mining Limited

Toro Gold’s US$305mln acquisition by Resolute shows that you don’t have to be listed to make a buck

Consolidation in the gold mining sector continues apace

The deal has a significant cash component

They always talked about listing, but the timing, or more specifically the market conditions, were never quite right.

Now Toro Gold, which has remained private since its inception around a decade ago, is about to be taken out by one of the stalwarts of the Australian gold sector, Resolute Mining (ASX:RSG)(LON:RSG).

The fit is clear enough. Toro’s Mako gold mine, currently producing at an annualised rate of just under two million ounces of gold a year, is located in Senegal. Resolute, a West African specialist which also has operations in Australia, doesn’t currently have any exposure to Senegal, but does operate the Syama mine across the border in Mali.

And it’s been no secret that Resolute has been aspiring to expand recently. The dust is still settling on the listing documents that took it on to the full board of the London Stock Exchange earlier this year, and it seems highly likely that the Toro acquisition was already in its sights at that stage.

After all, around US$170mln of the deal will be settled in Resolute shares, giving Toro shareholders the benefits of both a US$130mln direct cash payout and participation at a listed level in one of the world’s more established mid-tier miners.

On completion, Toro shareholders will account for 15.8% of the equity in the enlarged Resolute, although interestingly the two parties to the deal have a different idea as to how that stake should be valued in marketing the transaction.

Toro, which is perhaps less beholden to regulation, takes the reasonable view that the 142.5mln shares that are going into the hands of its own shareholders should be valued at the most recent Resolute closing price, A$1.78. That puts the valuation of the share component of the deal at US$175mln.

Resolute, on the other hand, argues that the valuation of the shares its handing over to Toro’s owners should be calculated on the basis of a 30-day volume weighted average price – handy, because Resolute’s shares have risen significantly over the past month or so, in tandem with the strength in the spot gold price.

On this interpretation, Resolute is able to present the deal as slightly less dilutionary than the Toro interpretation suggests. And of course, it’s axiomatic that negotiations have been going on far longer than a month, so Resolute has a point.

Either way, it’s an interesting final chapter for Toro Gold, a company created in the wake of the financial crisis, and which, because it was able to secure the significant backing of high net worths and private equity, never quite felt the need to sell equity on the open market.

The thinking was always clear: if the markets were on a roll, then well and good. But generally speaking, and especially in the wake of the financial crisis, they weren’t. Liquidity issues in the mining sector became especially pervasive and often resulted in listed vehicles with highly attractive medium-to-longer term assets being valued on the equity markets at significantly less than industry professionals knew they were really worth. This dynamic in turn lead to a reticence on the part of fund managers, since however good the long-term future of the asset, those with a responsibility for reporting quarterly NAVs and avoiding too many redemptions always knew that an underappreciated mining project was never going to cut it.

Not every company can make it through from grass roots exploration to production like Toro did though. In the case of Toro it required a quality asset in the form of Mako, which at the last count boasted a reserve of just under 900,000 ounces, and which has been producing ahead of budgeted costs.

But it also required a management team well versed in the mining world that knew how to build projects and find funds and keep all the necessary ducks in a row. Martin Horgan, the chief executive, is ex-Barclays Capital, from the days when Barclays was a real force in mining, and has a track record in management too.

His approach to fundraising was meticulous and exemplary, always involved cornerstones, and if it’s true that not every round was done at a higher price than the last, it is at least fair to say that the current exit price looks like a win all round.

He has been helped along the way by Adonis Pouroulis, a man responsible for the creation of the world’s fourth largest diamond company, and latterly by Nick Clarke, once voted CEO of the year by the Mining Journal for his stewardship of Central Asia Metals (LON:CAML).

Between them, these guys have shown that the pain and unrewarding graft of supporting a valuation on equity markets where liquidity is low and sentiment is anaemic, isn’t always necessary. There is another way to go.

Horgan will likely bank an extra bonus through the change of control clause in his contract, but for the run-of-the mill Toro investor this looks like a win too, with further upside still available through participation in Resolute.




Quick facts: Resolute Mining Limited

Price: 1.17 AUD

Market: ASX
Market Cap: $1.52 billion

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