Newmarket Gold’s dream team aims to consolidate industry

VANCOUVER — If past success is an indicator for future prosperity, Newmarket Gold (TSXV: NGN) could very well be on its way to the top. The company’s board and management roster includes a variety of industry heavy hitters with track records as dealmakers, making Newmarket’s  goal of becoming a mid-tier gold producer seem a lot more than just a branding experiment to attract investment capital.

Newmarket’s team crystallized 18 months ago, but the company didn’t make headlines until May 11, when it unveiled a $185-million deal with Australian-based Crocodile Gold (TSX: CRK; US-OTC: CROCF), and essentially picked up 200,000 oz. in annual gold production overnight.

According to Newmarket president and CEO Douglas Forster, however, the merger was the culmination of a year of work, and is the first step in a much larger, long-term strategy.

Forster is well known for his role as a senior executive in a couple of major transactions over the past five years, including: Terrane Metals, which was acquired by Thompson Creek Metals (TSX: TCM; NYSE: TC) in 2010 for $750 million; and Potash One, which was picked up by German-based chemical and salt major K+S in 2011 for $434 million.

Newmarket’s board of directors features the ubiquitous Lukas Lundin, New Gold (TSX: NGD; NYSE-MKT: NGD) executive chairman Randall Oliphant and Rainy River Resources CEO Raymond Threlkeld. And for good measure, Goldcorp (TSX: G; NYSE: GG) chairman Ian Telfer sits on the company’s advisory panel.

“We joined forces as a group in late 2013 and put the vehicle together. Our goal has been to acquire production assets and essentially consolidate the gold industry,” Forster explains during a phone interview.

“Since then we’ve seen a major downward spike in gold prices, and our team decided this was the time we should be busy with acquisitions, because I don’t think we’ll ever see gold assets ‘on sale’ like they are today. But we really wanted to focus on finding proper production assets. We didn’t want to buy anything that would basically be a call on the price of gold,” he adds.

Newmarket spent well over a year on its due diligence. The company reviewed 80 projects, but confined itself to stringent criteria. Any acquisition needed to be located in a stable mining jurisdiction — such as Australia or the Americas — operate with all-in sustaining costs of US$1,000 per oz. and host a relatively large measured and indicated resource base.

In fact, it wasn’t until early 2015 that Crocodile actually fit Newmarket’s metrics and became a target. The company operates three underground mines in Australia, and has dropped its all-in sustaining costs by 44% since 2012.

Crocodile’s global resources total 53 million measured and indicated tonnes averaging 2.83 grams gold per tonne for 4.8 million contained oz. That number includes the Fosterville, Cosmo and Stawell operations, as well as the earlier-stage Maud Creek, Pine Creek, Burnside and Union Reefs prospects.

Crocodile could crank out up to 220,000 oz. gold this year at all-in sustaining costs ranging from US$1,020 to US$1,100 per oz. During the first quarter the company produced 60,000 oz. gold at all-in sustaining costs of US$938 per oz.

The final domino to fall was a deal in early January, wherein Crocodile bought out a free cash flow-sharing arrangement with AuRico Gold (TSX: AUQ; NYSE: AUQ) for $17 million.

“We’d been following Crocodile for around twelve months, but from our view the deal with AuRico back in 2012 was an impediment due to the cash-flow arrangement on the Fosterville and Stawell mines. We know what it costs to get these deposits advanced, and since that work is done, we can start accelerating the process of extending the reserve base. A lot of operations in Australia run for 30 years, but never really have much in the way of a mine life,” Forster comments.

“That doesn’t say anything about execution or operational quality, because Rodney Lamond and his team are some of the best we’ve ever seen. What we’d like to do, however, is not only replace depletion, but also look at banking additional reserves to prudently extend our life-of-mine,” he says.

Under terms of the merger, Crocodile shareholders have the option to receive consideration per share of 1.228 Newmarket shares, 37¢ in cash or an equivalent share-cash combination subject to a maximum $20-million value. Based on Newmarket’s closing price at the time of the merger, the offer values Crocodile at a 37% spot premium.

After a 1-for-5 equity consolidation, Newmarket would have 134 million shares outstanding and US$40 million in cash. Crocodile generated nearly US$28 million in operating cash flow during the first quarter, and reported net income of US$15.7 million, or 3¢ per share.

Forster says the goal is to boost Newmarket’s annual gold production to 400,000 oz. with organic growth and further acquisitions. The company has some in-house potential via satellite deposits at its existing operations, including Maude Creek near its Union Reef mill and the Big Hill deposit at Stawell.

“Those could definitely add ounces, but what our team has done in the past is what we call a ‘gold roll up.’ Our plans are to look at other producing assets in Australia and the Americas that can add to our annual production profile. It’s a lot like the strategy behind New Gold, where you have an incremental build to a producer,” Forster elaborates.

“We’ve found the mergers and acquisitions space to be slow over the past year or so. I’m not saying there isn’t a lot of capital around, because there’s definitely significant competition right now for quality assets. The reason we put our team together is that we’re going to leverage our relationships in the capital markets and mining sector to identify our next deal,” he adds, noting that the company hopes to finish another acquisition within the next year.

After the deal, 85% of Newmarket’s shares would be held by private equity firms, with New York-based Luxor Capital and its affiliates accounting for 56% of that total. Luxor has entered into a lock-up agreement with Newmarket and agreed not to dispose of more than 20% of its position for a year.

According to in-house numbers, the post-merger Newmarket should have a $1.50 share price and $215-million market capitalization.