Gold Fields paid premium for Osisko to avoid ‘another Yamana’

GOLD Fields is one of the companies criticized for overpaying for assets following its C$2.16 billion acquisition of Osisko Mining last month.

The deal, which came at a premium of 55%, caught the attention of Barrick Gold CEO Mark Bristow. Known for his reluctance to engage in mergers and acquisitions, Bristow described the Gold Fields deal as “troubling.”

“These are signs of euphoria in the market,” Bristow said, adding that he does not intend to pay any premiums for the acquisitions.

“While consolidation is a good, healthy sign for the industry, it remains to be seen how the newly formed entity can perform,” said Wasif Latif, a portfolio manager at Sarmaya Partners. “History shows that M&As in general are not accretive over time,” he was quoted as saying in a Bloomberg report.

The purchase of Osisko Mining increased Gold Fields’ stake in Quebec’s Windfall project from the 50% it acquired in May 2023 to 100%. Still, analysts wondered whether Gold Fields had decided to take advantage of the higher gold price from existing assets and do the transaction later.

“Investors will be looking at the fact that Gold Fields has given up a significant portion of its expected cash flows over the next 12 to 24 months while taking on development and execution risk,” said BMO Capital Markets analyst Raj Ray. He acknowledged the potential of the Windfall project but said he was “a little surprised” by its timing.

While Gold Fields’ balance sheet was not at risk at the time of the transaction, the company was required to urgently address the technical challenges associated with accelerating the delivery of its Salares Norte project in Chile, which had been delayed over the past 12 months.

Gold Fields lowered its full-year production forecast by as much as 220,000 ounces to 2.2-2.3 million ounces — about 10% — mainly due to Salares Norte, where winter conditions were hampering mine start-up. On Aug. 23, the group reported a 20% decline in production to 918,000 ounces of gold due to delayed start-up at Salares Norte and production issues at South Deep.

“Windfall has all the hallmarks of a high-quality, long-life asset, but the mine still needs to be financed and built,” said Arnold van Graan, an analyst at Nedbank Securities. “Buying a development-stage asset (for a junior miner) increases the execution and financing risks,” he said.

The reality, however, is that Gold Fields’ hands were largely tied. Officially, the group commented, “The timing was a function of the process that Osisko was pursuing.”

But behind the scenes, Gold Fields was concerned that an intruder could potentially break in. This had happened to Gold Fields before, when its bid for Yamana Gold two years ago was thwarted by a joint bid from two North American companies.

“We see significant value in owning Windfall, which will be a high-quality asset with value for decades. In addition, there is value in being able to develop the asset as a full owner (in terms of flexibility in how we approach its development and operation),” said Sven Lunsche, a Gold Fields spokesman.

Gold Fields CEO Mike Fraser said on Aug. 12, when the Osisko purchase was announced, that he was pleased with the acquisition cost. “We see significant fundamental value and significant growth in this asset. On a 100% consolidated basis, we are very pleased with the price we paid for it.”

Fraser said in August that Osisko had been trading sideways for the past 12 months, which is not unusual for a single-asset development company. He added: “Windfall is one of the largest gold deposits in Canada and one of the top 10 gold deposits in the world by gold content. Windfall is expected to produce approximately 300,000 ounces of gold at an all-in sustaining cost of $758/oz. This would make Windfall one of the lowest-cost mines in the Gold Fields portfolio, with a current expected mine life of 10 years.”

A version of this article originally appeared in the Financial Mail.