Q&A: Evolution Mining to acquire Kundana assets from Northern Star Resources

Evolution Mining (ASX: EVN) announced on July 22 that it is acquiring assets from Northern Star Resources’ (ASX: NST), most of which are within eight km of its Mungari mine in Western Australia. The deal gives Evolution a portfolio of underground mines close to Mungari’s mill, “provides a pathway” to growing Mungari to a 200,000 oz. gold a year producer, and offers loads of exploration upside. Evolution will pay A$400 million ($371 million) in cash for Northern Star’s 100%-owned Kundana operations; its 51% interest in the East Kundana joint-venture; its 71% interest in the West Kundana joint-venture; and its 100%-owned Carbine project (see editorial on July 23 for details).

The company is paying for it with funds from an A$400 million institutional placement fully underwritten by J.P. Morgan Securities Australia  (104 million new ordinary shares at A$3.85 per share, a 5.4% discount to the company’s last closing price of A$4.07 per share), and a non-underwritten share purchase plan targeting to raise up to A$50 million.

In an email to the Northern Miner, Jake Klein, Evolution’s founder and executive chairman, discussed the merits of the transaction, which is expected to close in August.

The Northern Miner: What in your view makes this acquisition so important for Evolution? And why now?

Jake Klein: Evolution has long coveted these assets — this is because the combination through the acquisition makes industrial and commercial sense on every level.

Our Mungari mill is a modern and highly efficient mill, albeit confronting a declining production profile as the high-grade Frog’s Leg mine nears depletion and more low-grade material is processed.

On the neighbouring tenements, Northern Star has been successfully operating several high-grade underground mines but trucks its ore effectively past our Mungari mill to be processed 55 kilometres away at Kanowna Belle.

The consolidation of the district is a game-changer for Evolution and the Eastern Goldfields. The  tenements are contiguous — and most importantly we now have immediate access to significantly larger volumes of higher grade material and the opportunity to extract material synergies that were not available to either ourselves or Northern Star in the absence of this transaction.

This is one of those very rare deals in the gold sector where both parties can genuinely feel comfortable that this transaction creates value for both sets of shareholders — and this is because of the previously unrecognised value that can be realised through the synergies available as a result of the asset combination.

TNM: When did Evolution start talking with Northern Star about a potential sale and were there other suitors interested in these assets?

Klein: Both parties recognised the synergies that were available and we started a serious engagement in late May. Due diligence and a site visit was completed in June and we made a non-binding offer in early July. Northern Star wanted to get it done by their strategy day (July 23) and we turned on the turbo boosters to get it done by then. No other party could have valued and realised the synergies that we can.

TNM: With your recent acquisitions in Canada (Red Lake and Battle North Gold), and now this deal in Australia, it seems like a lot of M&A activity. What do you see as your biggest challenges in the year ahead?

Klein: They are both logical, bolt on deals making both Red Lake and Mungari better assets. We are now in that “show me” phase where investors will want to see tangible evidence of the value creation from these acquisitions.

We now have four outstanding cornerstone assets — all of them with potential to grow to the next level. We remain one of the lowest cost gold producers in the world, and remain very focussed on the quality and margin of the ounces rather than the volume. That in our view is the best way build a great gold company that will deliver superior returns to shareholders.