Gold miners know about risk, but that proposition takes on new meaning when the mine happens to be in Burkina Faso — where a military coup last year briefly toppled the government and led to civil uprising. This was the backdrop to Endeavour Mining’s acquisition of True Gold. Endeavour was no stranger to West Africa, though. With mines across the region, the company was ready for the challenges that lay ahead.
LEXPERT: This seemed like a pretty risky play. As I understand it, the government in Burkina Faso had fended off a coup attempt in September 2015.
Morgan Carroll (Executive VP and GC, Endeavour): As a West African gold producer, we understand the political backdrop there very well. The attempted coup was a short-lived affair by an elite military unit linked to the former president, but it gained no traction with the general population, who continued to back the transitional government. That was then reflected in the November presidential elections, which were certified open and fair and brought Roch Marc Kabore to power.
LEXPERT: There’ve also been disturbances reported around True Gold’s Karma mine.
Carroll: There were historical disturbances at the project, particularly in late 2014 and early 2015. A key focus of our due diligence was to ensure that True Gold had addressed the concerns of the community, although we are mindful that a strong social licence to operate means ongoing effort, proper life-of-mine CSR programs and strong issue management by Endeavour.
LEXPERT: Did you have to bring in experts in international law? Or local law firms?
Carroll: We relied on local counsel in Burkina Faso to confirm our understanding of the status of the Karma project and its ability to operate in the future. Because of the public-market nature of the M&A elements, we of course relied on our usual advisors, Stikeman Elliott, in Vancouver.
LEXPERT: I guess that brings you in, John. Both companies were Canadian-listed, though the mines were African. Did you have to travel to Burkina Faso at all, or were all discussions held in Canada?
John Anderson (Stikeman Elliott LLP, for Endeavour): The majority of the conversations and negotiations occurred in Vancouver, given True Gold’s Vancouver head office. In our experience, it is rare for the deal teams to travel to, for example, a mine site when the relevant head offices are located in Canada.
LEXPERT: Despite the risk, the upside for Endeavour must have been too good to resist. Karma was about to pour first gold, and the mine is seen as a low-cost producer, right? Was that the bottom line?
Carroll: Times have changed in the mining sector since the historic gold price highs in 2012. Lower long-term price assumptions mean that aggressive cost management has become a central driver of our business. That also means that growth needs to come from leaner, more efficient assets. We’ve been quite successful at this in the rest of our portfolio. Karma is an excellent fit, and we believe that our experienced operations team can get the best out of the ore body in terms of ounces and costs. The asset extends the average life of our operations, and has encouraging upside exploration potential. ... We’ve also been able to acquire Karma without importing additional corporate overhead. So, again, cost – and the ability to operate at sustainably lower costs – looms large as a motivator for or a variable in an acquisition.
LEXPERT: Why agree to a buyout just as your mine is about to pour its first gold? Was this just about the premium offered — around 25 per cent at the time of close — or was True Gold also looking for something else? Easier access to financing perhaps?
Carroll: No, I think it’s more about scalability of a business in the mining sector. Mines take years to develop, finance and build. If you’re one of the lucky ones who finally finish one off, the market doesn’t give you much time to show it where your next leg of growth is going to come from. Single-asset companies always wrestle with this. So, as you imply, it’s not just about the premium. True Gold would have been mindful of what its shareholders – who are gold investors – want. And those investors now have more of what they want — a stake in a bigger, more successful gold company with better long-term growth, less risk and a lower cost of capital. ... They’ve also secured a premium which is a good reward for the risk their investors have already taken. On the other hand, as we’ve shown, it’s certainly possible to grow from one asset, and I’m sure the True Gold team would have made a success of that, but it takes time, opportunity and more risk appetite. You have to also bear in mind that developing a mine is one set of skills; operating it is quite another. We do both of those well.
LEXPERT: There was also the matter of La Mancha, Endeavour’s largest shareholder. The company exercised its anti-dilution clause, investing a further $85 million in Endeavour in order to maintain its 30-per-cent stake. How common are these, and did it present any issue in this deal?
Carroll: When we acquired the Ity mine from La Mancha last fall, the company negotiated a pre-emptive right entitling it to maintain a 30-per-cent interest in Endeavour. We see La Mancha’s decision to invest a further $85 million in Endeavour and maintain its 30-per-cent shareholding as a strong vote of confidence in Endeavour’s future. [La Mancha Chair] Naguib Sawiris has a common vision with Endeavour to build a leading African gold producer.
LEXPERT: When the deal was announced, in early March, Endeavour’s shares fell. This devaluation affected both companies, since True Gold’s offer was based on Endeavour’s share price. Did the market reaction give either side pause for thought? Was there an effort to sweeten the deal?
Anderson: The standard market reaction to the announcement of an acquisition proposed to be completed with shares is for the buyer’s shares to fall slightly in value and the target company’s shares to increase to the implied transaction value, less an appropriate deal-completion risk discount. In this case, there was no untoward or unexpected change in the market prices of the shares. There was no pause or thought to change the deal terms and, as it turned out, everyone participated in the 35-per-cent increase in Endeavour’s share price from the time of announcement to the time of completion.
LEXPERT: Shareholders could have voted against it. You needed two-thirds support, and you got way more than that, right?
Carroll: Yes, the approval levels achieved were far in excess of the 67-per-cent minimum: over 99 per cent on the Endeavour side and over 95 per cent on the True Gold side. We see this as a strong endorsement of Endeavour’s continuing strategy to grow in West Africa. Investor confidence has really returned in gold since the beginning of this year. You can see that in gold and equity prices, and in market flows. If you believe in a higher gold price over time, it makes sense to add good quality assets or production when prices are closer to the lows. We’ve also been growing during a period of time when others have been hesitant, so we hope the equity market will reward that.
LEXPERT: The BC Supreme Court had to approve the deal, as well as the TSX. Were there any other regulatory approvals required? From the Burkina Faso government? Or even community groups?
Carroll: Fortunately, completion of this transaction did not require any unusual regulatory or governmental approvals, and any that were required were obtained in the ordinary course.
LEXPERT: There are so many rich details around this transaction. What would you say was most memorable?
Carroll: We announced this transaction hot on the heels of closing the La Mancha deal, which I don’t think the market expected. One of the benefits was that the significant anti-dilution cash injection by La Mancha further bolstered our balance sheet, and gave us an important shot in the arm for showing we could fund our Houndé mine at anticipated gold prices without further debt financing. Investors and commentators understood the rationale and value of a nice new low-cost asset that helps to build an even larger new low-cost asset.
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