US Edition European Goldfields
730p -35p
Questor says HOLD
The move, which is recommended by European Goldfields's board, has gatecrashed a previous deal with the Qatari sovereign wealth fund, which shareholders were due to vote on later this week.
This vote has now been postponed, as proxy votes had already been sent in but investors may now wish to change their mind following the latest news.
A vote on the Eldorado offer will be held in February, with one on the Qatari deal soon after. For the Eldorado deal to go through, two-thirds of Goldfields's shareholders have to vote in favour and more than half of Eldorado equity holders.
Questor thinks there are advantages to the new offer. For a start, there will be no dilution. The Qataris own 9.9pc of European Goldfields already, but in the funding deal for its mine development, this would increase to about 30pc and dilute existing shareholders.
The proposed Eldorado deal is mostly in shares, with Eldorado offering 0.85 of its own shares and C$0.0001 in cash for each European Goldfields share. This values the deal at around 812p a share at current prices.
Although the deal is mostly paper, it gives upside in Eldorado. Last year, Eldorado produced about 600,000 ounces of gold at $423 an ounce. This means it has significant cashflows to fund the construction of Goldfield's mines, reducing development risk.
Under the terms of the deal, Goldfields's shareholders would end up owning 22pc of Eldorado.
Another relevant issue to Goldfields's future performance is the rating the market attaches to gold shares. Typically, pure gold-mining companies trade on higher earnings multiples than other miners, and this is especially the case in London.
However, Goldfields has not been fully benefiting from this "gold premium" as its production operations are significantly exposed to base metals such as copper, lead and zinc. These are being produced at its operating Stratoni mine in Greece.
However, a merged company would have minimal exposure to base metals and should trade at a higher rating. If shareholders agree to the two companies being combined, it will have a market capitalisation of C$11bn and net debt of about $365m (£235m).
The shares are still 12pc lower than the recommendation at the start of January, when they were named as a tip of the year, compared with a FTSE 100 down 18pc. However, they are up 84pc since they were first recommended as a buy on March 21, 2009 at 395p.
The shares are trading below the implied offer level because it is effectively an all-share deal. The valuation also implies the market does not expect the Qataris to come in with a counter-offer.
Canadian analysts monitored by Bloomberg are positive on Eldorado's prospects. Of the 19 analysts monitored, they have an average price target that is 52pc above the current share price.
Questor likes the Eldorado deal because of the lack of dilution and because of further potential upside.
For now, the rating is hold.