St Barbara's bid for Allied signals the return of the gold premium
ST Barbara (SBM) has not set the world on fire with its agreed scrip-cash bid for southwest Pacific gold producer Allied Gold (ALD). Far from it, actually, with St Babs shares now 25 per cent lighter than they were before the offer was announced last Friday.
The main factor in the sell-off has been the thumping 90 per cent premium in the offer on the day it was announced. That obviously caused some investors to choke on their Weet-Bix, as premiums of 30-40 per cent have come to be accepted as the norm.
But given the present situation where gold equity values have been thrashed despite continued strength in gold prices, we had better get used to thumping premiums being the order of the day in the wave of merger and acquisition in the sector everyone expects in the second half of the year.
It is an issue that RBS Morgans tackled in a note on the disappearance of the gold premium. It explained that in "normal" markets, gold equities have long traded at 1.3-1.4 times their underlying net present value, the so-called premium. But since late last year, markets have eroded the premium. Sector valuations now sit at about one times NPV.
At the same time, equity valuations per ounce of gold in the ground have tumbled 44 per cent from $US130 an ounce to $US72 an ounce.
"At such steep discounts to normal market multiples, gold equities offer significant upside when normality returns to market valuations," the broker said.
It reckons that typical sector NPV multiples will be restored once key economic milestones restore confidence in Europe, easing the risk-aversion stance of investors in the process.
It all sounds a bit counterintuitive to gold's haven status in troubled times. But there you go. The point today is that restoration of the gold premium will have a telling impact on gold equity valuations.
That indicates that the St Babs bid is not as over-the-top as its 90 per cent premium on day one would normally suggest, particularly for an offer where there was "boots on the ground" due diligence beforehand, and where 54 per cent of the target shareholders have put their hands up as acceptors.
Back to RBS Morgans. It has come up with a list of gold equities that could enjoy major share price upside on the gold premium returning. At the top end sits Intrepid Mines (IAU) with 282 per cent upside, Ampella (AMX) at 268 per cent, Gryphon (GRY) at 237 per cent and Kentor (KGL) at 208 per cent. It's worth noting at this point that those high-end upsiders generally have issues that need to be resolved before posting anywhere near those sorts of gains.
But the general point is made: assume a return of the gold premium, or at least a lifting of Europe-induced risk aversion, and happier days for the gold stocks will have arrived, St Babs included.
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