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Tuesday, November 07, 2017 Derek Macpherson

CG’s Bid Leaves Room for Another Bidder on AMI


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Centerra Gold (TSX:CG) has announced a friendly all-cash bid for AuRico Metals (TSX:AMI) at a price of C$1.80 per AMI share, which represents a premium of 38.5% to yesterday’s close for a total transaction value of C$310M. In our view this bid undervalues AuRico’s diverse assets (development assets and royalty portfolio) which leaves room for another bidder. We believe Aurico’s assets are worth more than $2/share (Figure 1); however, the diverse nature of them is likely to require a joint bid from a royalty and operating company. Consequently, we consider the odds of another bid to be ~30% (medium).


Purchase price appears to undervalue AMI’s diverse assets. With AuRico’s cash balance at approximately C$27.1M, Centerra is paying ~C$281M for the royalty portfolio, which includes a 2% NSR on Fosterville and the feasibility stage Kemess project, which includes both the Kemess Underground (KUG) and Kemess East (KE) deposits. Based on royalty and development peers, Centerra appears to be getting a discount on both the royalty portfolio and the development project. Using royalty peer multiples (17.1x), the royalty assets based on recent 2017 guidance is worth ~C$173-184M, leaving a residual value of ~C$97-108M for Kemess. However, if you incorporate the likely production increase from Fosterville based on recent exploration success (and October production), the royalty portfolio is probably worth ~C$228-261M and we believe that Kemess based on other development peers is likely worth between ~C$150-200M. We note that Centerra’s bid also provides technical validation for Kemess. Multiple valuation scenarios are laid out in Figure 1, and we believe that the assets are worth more than $2/share.

Discounted offer provides room for another bidder; but likely to need a unique structure. We consider the odds of a subsequent bidder to be ~30% (medium), and while we view the initial bid as discounted, the subsequent bidder is likely to pay a higher value for both the royalty and development assets, consequently it may be a joint bid from a royalty and operating company. We anticipate that Centerra is likely to sell the royalty portfolio once the transaction closes, and a subsequent bid would only speed up that process. We note that the C$12M break fee, is likely to only provide a minor impediment to another bidder, whereas the friendly nature of the transaction is likely to be a larger challenge.


Centerra bids C$310M for AuRico. Centerra Gold announced a friendly acquisition of AuRico with an offer of C$1.80 per AMI share in cash, which represents a 38.5% premium to AuRico’s last close on Monday and a 37% premium to Aurico’s 20-day VWAP. Centerra has stated that it will finance the acquisition with cash on hand (US$352 as of Sept 30th) and a new $125M credit facility, which gives the company current liquidity of US$477M (excluding AuRico’s cash balance). The transaction has unanimous support from AuRico Metals Board of Directors, which includes Centerra Gold CEO, Scott Perry. Approval of the transaction from AuRico shareholders awaits a shareholder meeting in December 2017, where 66% of shareholder votes cast must in approval of the transaction. The shareholder meeting is expected to take place in December with the transaction being completed in January 2018.


Derek Macpherson | VP Mining Analysis
Victoria Ellis Hayes | Associate
Alex Pitcher | Associate
 
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All values in USD unless otherwise noted.

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AuRico Metals Inc. - TSX:AMI - 1, 2, 3, 4
Centerra Gold Inc. - TSX:CG - None

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