St Barbara's golden handshake

About a year ago St Barbara tried to gate-crash a Newcrest Mining-backed merger of Catalpa Resources and Conquest Mining in an attempt to create the leading mid-tier gold miner. Today it announced a different means to the same end.

This time it is, however, different. Where the attempt to force a merger on Catalpa failed because Catalpa wasn't happy with the exposure its shareholders would have had to the merged entity, St Barbara's $556 million takeover/scheme of arrangement merger with Allied Gold Mining Plc is locked up, with the support of a majority of Allied's shareholders.

The ambition, however, is very similar. St Barbara has the very good, low-cost gold Gwalia mine in Western Australia throwing off a lot of cash. The mine, however, has a remaining life of only seven or eight years.

Allied has producing resources in Papua New Guinea and the Solomon Islands and exploration prospects in the Pacific Rim that have considerable upside but where the execution has disappointed, which has resulted in a halving of the Allied share price over the past year.

Bringing Allied's less mature but long-life assets in riskier jurisdictions next to St Barbara's developed operations and experienced management would create a bigger and more diversified portfolio of resources with longer term upside. The group would have three established mines, a fourth under development and some highly prospective exploration rights.

In that respect the proposed merger, which would create a group with about $1 billion of market capitalisation, is not dissimilar in concept to the Newcrest merger with Lihir Gold, with the strong Australian base and cash flows enabling Newcrest to contemplate acquiring a group that had a chequered development and production history but a very substantial resource.

Unlike the Catalpa proposal, St Barbara has ensured this merger will succeed, with 35 per cent of Allied's capital committing irrevocably to support it and another 18.9 per cent verbally committing.

That's not surprising, given that the offer is at a 92.3 per cent premium to Allied's pre-announcement share price. In another similarity with the Newcrest/Lihir merger there is a substantial overlap in terms of common shareholders, estimated at about 30 per cent.

St Barbara attributes the meltdown in Allied's price over the past year to its management's failure to deliver on production promises. St Barbara chief executive Tim Lehany and a technical team spent two weeks poring over Allied's mine sites and prospects and are confident they can better exploit Allied's 3.2 million ounces or reserves and nine million ounces of resources to both lengthen the merged group's production life and lift St Barbara's production from about 260,000 ounces of gold a year to 435,000 ounces.

That would make St Barbara the leading mid-tier gold miner in terms of production, reserves and resources, slightly ahead of Alacer Gold, although it would be behind Alacer and Regis Resources in terms of market capitalisation.

Allied's an unusual entity. It is a British company listed on the London, Australian and Toronto stock exchanges. If the offer succeeds St Barbara will be purely ASX-listed, although Allied shareholders, because the offer is a mixture of cash and shares, will own about a third of the merged entity.

Assuming St Barbara can both execute the merger and add value to Allied's projects the substantial increase in the gold resource it would control and in its market capitalisation should help it win something of a re-rating from the market.