Morningstar | Potential Acquisition of Karlawinda Now Unlikely, Lowering our FVE to AUD 2.90. See Updated Analyst Note from 01 Oct 2018
The proposed acquisition of ASX-listed Capricorn Metals is now unlikely to proceed. As a result, we’ve lowered our fair value estimate for Regis Resources to AUD 2.90 from AUD 3.05 per share. Given Capricorn's board was supportive of Regis Resources’ proposed acquisition, we had factored a 75% chance of success. But with a major shareholder rejecting the offer and Regis now disengaging, we think the probability of success is zero. This sees value from the development of Capricorn Metals’ Karlawinda deposit removed from our fair value estimate for Regis. This is the sole driver of the lower valuation.We thought the potential deal was a good one for Regis, as the firm would’ve been issuing overvalued stock to Capricorn at a price of about AUD 3.80 per share, 31% higher than our AUD 2.90 stand-alone fair value estimate. In addition, we valued Capricorn’s Karlawinda gold project at around AUD 170 million, a substantial premium to the approximate AUD 80 million acquisition price.
Regis shares have fallen about 9% since the deal was announced and, despite management disengaging, have yet to recover. We think this reflects the firm’s desire to use scrip for acquisitions. Using scrip is sensible as we think the shares are richly priced, but it also signals to the market that management may think the shares are overvalued too. We think the market still assumes more exploration or acquisition success, or a lower cost of capital, than we think reasonable. Relatively short reserve life means we think it’s likely Regis will continue to look at acquisitions to sustain longer-term output and profitability.
A binding offer to acquire Capricorn Metals was contingent on 90% minimum acceptance. While the Capricorn board said it would unanimously support the deal, Capricorn’s largest shareholder, Hawke’s Point, said it did not support the proposal. Hawke’s Point owns 18.9% of Capricorn. It can stop Regis reaching 90% acceptances and moving to compulsory acquisition.
Regis Resources is a gold producer. Co. and its controlled entities are engaged in the production of gold from the Duketon Gold Project; exploration, evaluation and development of gold projects in the Eastern Goldfields of Western Australia; and exploration and evaluation of the McPhillamys Gold Project in New South Wales. Co. has two reportable segments which comprise the Duketon Gold Project; being Duketon North Operations, comprising the Moolart Well Gold Mine, and Duketon South Operations, incorporating the Garden Well Gold Mine and the Rosemont Gold Mine.
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