In a Dec. 17 research note, Haywood analyst Kerry Smith purported that Equinox Gold Corp.'s (EQX:TSX.V) acquisition of Leagold Mining is "a good transaction at a good price" and recommended accumulating shares.
Smith outlined the deal. With the transaction, Leagold shareholders will receive 0.331 of an Equinox share, or CA$2.70, per Leagold common share based on the closing price on Friday, Dec. 13.
When the transaction closes, expected in Q1/20, existing Equinox shareholders will hold 55% of the shares outstanding and Leagold shareholders will hold 45% of the pro forma company.
"We like this deal," Smith commented. "It builds scale, improves per share metrics and delivers more liquidity for shareholders, which should lead to improved multiples over time and likely also inclusion in the GDX and GDXJ."
Smith highlighted that with the combined assets, Equinox will achieve its gold production goal of 1 million ounces (1 Moz) well ahead of its 2023 target. With a total of six operating mines, in the U.S., Mexico and Brazil, and another, Castle Mountain in California, under construction and slated to start up in 2020, production in 2020 is expected to total about 700,000 ounces and in 2021, hit the 1 Moz target.
"This transaction moves the company up to midtier status," the analyst added.
Estimated cash flow from all of the combined operations in 2020 is US$300 million, according to consensus.
Another positive note to the story is that Equinox already has the funding in place for the transaction, Smith noted. It includes US$670 million financing package: a bank facility for US$500 million, US$40 million from Equinox Board Chairman Ross Beaty and US$130 million from Mubadala Investment Co. Accordingly, following the merger the company will have about US$270 million in cash.
Finally, the new Equinox will boast an "all-star cast," Smith pointed out. Along with Beaty as the board chairman, Neil Woodyer will be the CEO. Christian Milau will serve as executive vice president corporate, Attie Roux will hold the chief operating officer position and Peter Hardie will be the chief financial officer. The board of directors will consist of eight individuals, four from each of the two companies.
"Equinox has taken a bold step, announcing a merger of equals," Smith concluded. It is a "well-planned and accretive acquisition."
Haywood has a Buy rating and a CA$13.75 per share target price on Equinox. The stock is now trading at about CA$9.28 per share.
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