‘Ottawa’ Centerra Gold Inc CEO Scott Perry confident new acquisition will shrink valuation gap with peers
TORONTO — For Scott Perry, Centerra Gold Inc.’s US$1.1-billion takeover of Thompson Creek Metals Co. Inc. is largely about valuation.
As long as Centerra relies on the Kumtor mine in Kyrgyzstan for all its free cash flow, it is certain to trade at a big discount to peers. Political risk has been a problem for the Toronto-based miner since Kumtor opened in 1997, and it escalated into a full-blown crisis this year as the company launched an arbitration case and had its office raided by Kyrgyz authorities.
Buying Thompson Creek, which owns the large Mount Milligan mine in British Columbia, makes the company look a lot less frightening to investors.
Perry, Centerra’s chief executive, said the company is trading at about 0.7 times net asset value (NAV) by analyst estimates. By comparison, industry peers are trading at around 1.3 or 1.4 times NAV. He is confident this deal will shrink the valuation gap.
“I think (the acquisition) should really underpin a strong re-rating going forward,” Perry said in an interview.
“Half our net asset value now is domiciled in Canada. I really think it has favourably changed the complexion of the company.”
He noted that Centerra’s $170-million bought deal financing, which launched Tuesday afternoon, was met with strong demand from investors. That suggests they are supportive of the acquisition. The proceeds cash will be used to reduce Thompson Creek’s heavy debt load, which totaled US$823 million at the end of March.
Of course, one wild card is how Kyrgyzstan reacts. The government owns 32 per cent of Centerra shares and would get diluted down to approximately 27 per cent as a result of the all-stock deal, according to TD Securities analyst Greg Barnes.
Perry spent the past four days speaking to Kyrgyz representatives about the acquisition. He said they accept the rationale for buying Thompson Creek, but he declined to comment on whether they support it. He didn’t speculate on how the deal is being received in the upper echelons of the Kyrgyz government.
Plenty of analysts and investors reacted favourably to the transaction. Barnes called it a “necessary diversification” of political risk and estimated it will be accretive to pre-tax earnings per share by 10 to 15 per cent. However, he did warn about a potential backlash in Kyrgyzstan.
On the other hand, Canaccord Genuity analyst Rahul Paul said in a note that the negatives of the transaction outweigh the positives. He said the value to Centerra shareholders is limited, both because of Thompson Creek’s big debt load and because of a pre-existing gold stream on the Mount Milligan mine (which is owned by Royal Gold Inc.).
Perry noted that the Royal Gold stream was renegotiated so that the amount of gold Centerra has to sell into it is dramatically reduced. He said that was a necessary move to make this deal happen.
He also said the debt Centerra is absorbing is “very serviceable.” He pointed out that the company has more than US$500 million of cash, and both Kumtor and Mount Milligan are highly profitable at current metal prices.