Mining takeovers and mergers are hot right now. In September, Alacer Gold tied the knot with SSR Mining in what was branded as a merger of equals. The deal was very straightforward and like many mining combinations over the past 18 months it was all stock and conducted at market prices. Now that the transaction is done, SSR Mining owners control 57 per cent of the pie, while Alacer stockholders own 43 per cent. As Alacer shareholders, we welcomed the news and feel each organization brought different strengths and weaknesses to the table.
SSR Mining’s biggest advantage is its geographic diversification. The company has mines in Saskatchewan, Nevada, and Argentina, as well as development projects in Mexico and Peru. Having operations spread out over many countries improves cash flow resilience and lowers the chances of operating disruption. The odds of COVID-19 (or something else) temporarily halting activity at all these sites at once is low. That said, while the mine-life, production cost profile, and mineral quality associated with these assets are all respectable, none are world-class. This lack of a top-notch asset was arguably SSR’s biggest weakness.
By contrast, Alacer possessed a top-notch asset in its Çöpler mine. Çöpler sports one of the longest mine-lives in the industry and has an enviable production profile with a low-cost base per ounce too. It functions as a gigantic cash flow machine, with significant exploration and development potential.
Alacer also brings a management team with deep knowledge of sulphide projects to the table. Çöpler used to be an oxide only processing facility, but in early 2019 Alacer completed the multi-year Çöpler Sulphide Expansion Project on time and under budget (for a cost of $660 million versus a preliminary estimate of $744 million). That’s rare within the mining industry, especially for an operation of this scale. Alacer’s management experience with sulphides could unlock value for SSR because its Marigold Mine in Nevada has a smattering of surface level oxides as well as deeper sulphide targets.
The problem for Alacer is the fact Çöpler is in Turkey. While I am comfortable with this risk and even visited the site myself, many are reluctant to invest in Turkey. The country is often in the headlines and gives many investors cold feet with its tumultuous political, economic, and geopolitical landscape. In our estimation, Alacer’s concentration in Turkey hampered the organization’s valuations.
By marrying the two miners, Alacer owners are getting diversification outside of Turkey, and SSR shareholders are getting access to a world-class mine and an experienced management team. It is also worth mentioning that both companies had strong balance sheets going into the merger, and stockholder dilution was relatively low versus peers. In other words, both organizations were managing their finances well.
Since the merger closed, the combined management team has hit the ground running. A new masterplan for Çöpler has been published and the multi-year outlook is promising. Moreover, the 2020 production outlook has been updated to a range of 680,000 to 760,000 gold equivalent ounces at an All-In-Sustaining-Cost (AISC) of $965-$1,040 per ounce. This is well below the current gold price and should generate healthy margins. The corporation also announced it would start issuing a quarterly dividend of $0.05 per share starting in the first quarter of 2021. Though this only translates to a yield of roughly one per cent, dividends are less common within the mining space and having a payout speaks to a company’s cash generation potential.
At Contra we have owned Alacer (and now SSR Mining) in both portfolios since 2014. In the months prior to this deal being announced, we thinned our position by roughly two thirds for gains between 231 per cent and 405 per cent. While these returns were fantastic, we are holding out for more. The updated sell range is between $34.21 and $41.66, a distance from the current price around $25. This wide range reflects the high degree of uncertainty around where metal prices will go and how development projects will unfold in the coming years. Nevertheless, there is likely a good runway ahead for this combined entity.
Philip MacKellar is a writer for the Contra the Heard Investment Letter