Fortuna Silver to buy Roxgold in US$884 million deal

Fortuna Silver Mines (TSX: FVI; NYSE: FSM) is buying Roxgold (TSX: ROXG; US-OTC: ROGFF) in an all-share deal  valued at about $1 billion (US$884.32 million), as strong gold prices spurs a wave of mergers and acquisitions in the sector.

Vancouver-based Fortuna, which has operations in Peru, Mexico and Argentina, said the combined company would produce about 450,000 gold-equivalent ounces a year at all-in sustaining costs of about US$950 per oz. gold equivalent.

West Africa focused Roxgold’s shareholders will receive 0.283 common shares of Fortuna and $0.001 for each Roxgold common share held.

The exchange ratio implies a consideration of about $2.73 per Roxgold share, a 42.1% premium to its last closing price.

After the merger, existing Fortuna and Roxgold shareholders will own about 64.3% and 35.7%, respectively, of the combined miner.

Fortuna CEO and co-founder Jorge A. Ganoza said the acquisition will provide his company access to a complete business platform that brings low-cost gold production and a permitted feasibility-stage project in West Africa, along with a robust exploration pipeline and seasoned executive team. 

“We have followed the success of the Roxgold team for a number of years, from their early start at Yaramoko back in 2015,” Ganoza said on a conference call. “Since then, John and his team have successfully continued to expand their business in West Africa, and today, by combining our companies, Fortuna is gaining access to a platform for continued growth in one of the most prolific gold regions in the world.”

Gaining access to the Roxgold platform, Ganoza continued, “will mean 1) immediately adding low-cost production from Yaramoko; second, a permitted feasibility stage development project, Seguela, with 49% IRR and pre-operational capex under US$150 million; third, a robust exploration pipeline; and fourth, a seasoned team of senior executives and site managers with a track record of success discovering, developing and operating mines in the region.”

The transaction, he added, “creates a premier global intermediate precious metals producer with exciting near and medium-term growth … this is not just a combination of quality assets but equally importantly we are bringing together two teams of high performers in their respective jurisdictions and this is one of the things I’m personally most excited about.”

Roxgold CEO John Dorward said the business combination would provide the company’s shareholders with an immediate premium and a “unique opportunity” to participate in the creation of a new global mid-tier precious metals producer, with significant organic growth and cash flow generating potential.

“We feel very confident that this is the logical next step for Roxgold,” Dorward said on the conference call. “While we have had a great deal of success in Burkina Faso and Cote d’Ivoire over recent years, we feel that the best future for our stakeholders is to combine with a company of the calibre of Fortuna. The future belongs to liquid, well diversified and capitalized companies and the combined company will have a wealth of compelling growth opportunities to pursue. … Fortuna is comprised of genuine operators and mine builders and we look forward to a very bright future.”

Roxgold’s shareholders, Dorward added, “will retain a significant ownership in the combined company, and it’s my belief that the combined company will emerge as the go-to name for investors seeking meaningful growth allied with a strong balance sheet and proven management team.”

The combined cash balance will total about US$200 million. 

This year, Fortuna’s San Jose mine in Mexico is expected to produce between 5.8 and 6.5 million oz. silver and between 38,000 and 42,000 ounces of gold. Its Caylloma mine in Peru is forecast to churn out 1.0 to 1.1 million oz. silver, 29 to 32 million lb. lead and 44 to 49 million lb zinc., and its Lindero mine in Argentina between 140,000 and 180,000 oz. gold. Roxgold’s Yaramoko mine is on track to produce an estimated 120,000 to 130,000 oz. gold. 

Roxgold expects its Seguela gold project in Cote d’Ivoire to be in production in 2023 and produce an annual average of 133,000 oz. gold during the first six years of its expected nine-year mine life. The company’s Boussoura advanced exploration project in Burkina Faso, meanwhile, is scheduled to have a completed initial resource estimate sometime in the second half of this year.

The terms of the deal include a $40 million termination fee, and the transaction is expected to close by the end of June or early July.

Craig Stanley, a mining analyst who covers Roxgold at Raymond James, wrote in a research note that the company “could be in play” and said there are two significant gold companies that are already in Africa that might be interested: Centamin (TSX: BEE; LSE: CEY) and B2Gold TSX: BTO; NYSE: BTG). 

“Centamin is already in Africa with its sole producing mine in Egypt, as well as projects in Cote d’Ivoire and Burkina Faso, both countries where Roxgold is located,” Stanley noted. “As well, Centamin could offer a cash component. Recall in late 2019 Centamin fought off a bid from Endeavour Mining.”

As for B2Gold, the analyst stated, the company already has two producing mines in Africa, Fekola and Otjikoto. “As well, management has stated interest in getting a footprint in Cote d’Ivoire, which of the current hard rock mining countries in West Africa, has the second largest GDP, lowest corporate tax rate (along with Mali at up to 25%), and a competitive royalty structure.”

Stanley also pointed out that other companies with mines in the country include Barrick Gold (TSX: ABX; NYSE: GOLD); Endeavour Mining (TSX: EDV; US-OTC: EDVMF) and Perseus Mining (TSX: PRU; ASX: PRU). “Cote d’Ivoire also has the largest exposure of Birimian rocks with excellent exploration potential as seen with Roxgold’s continuing success at Seguela, Endeavour at Fetekro and Montage Gold at Morondo. B2Gold could offer a significant cash component though we note management in the past few years has stated it is against paying a premium.”

M&A “second wave”

The gold sector has seen an influx of mergers and acquisitions in the past six months, fuelled by strong metal prices and pressure to replace reserves that have been mined.

Bank of America analyst Michael Jalonen predicted in a note early this year another round of consolidation for the industry in 2021 among small to medium-size gold miners.

Jalonen and his team noted that gold reserves have been falling since 2012, while gold output has remained stable. They added that an effective method to replenish depleted reserves were mergers and acquisitions. 

Yamana Gold (TSX: YRI; NYSE, LSE: AUY) is expanded its footprint in the precious metals-rich Abitibi region of Quebec, Canada, by acquiring all shares in smaller rival Monarch Gold late last year.

In January, Agnico Eagle Mines (TSX: AEM; NYSE:AEM) merged with TMAC Resources, adding 3.5 million ounces of reserves in the process. That more than replaces Agnico Eagle’s reserves mined last year.

Most recently, Scottie Resources (TSXV: SCOT) and AUX Resources (TSXV: AUX) announced a potential merger that would consolidate the two companies’ gold-silver holdings in the Stewart mining camp in B.C.’s Golden Triangle. 

Junior Stratabound Minerals (TSXV: SB), which is advancing its Golden Culvert project in southeastern Yukon, said last week it was acquiring California Gold Mining (CNSX: CGM) and its Fremont gold project in the U.S.