Gold Fields won't raise its Northern Star bid until the board engages, as the A$38.7 billion offer slips below Northern Star's share price

Gold Fields is taking its rejected A$38.7 billion ($27.1 billion) pursuit of Northern Star Resources straight to the Australian miner's shareholders, but its chief executive says he will not put a higher offer on the table until Northern Star's board signals it is willing to talk. Meanwhile the mostly-stock proposal has lost so much value that Northern Star's chairman says it is now worth less than his company's shares.

Talks first, price later

Gold Fields chief executive Mike Fraser has spent the past week meeting Northern Star's institutional investors in Perth, Sydney and Melbourne. He says the market expects his company to come back with a better offer, but he wants a signal from Northern Star's board first. Fraser told Reuters on Thursday, Oct. 15, that "before you get into … throwing in new offers, you've got to at least have some reciprocation to say, 'Actually, we think there is a pathway [to value] here'." He added: "At the moment, we're not hearing any of that."

In an interview in Melbourne published Sunday by The Sydney Morning Herald, Fraser laid out the order he wants: agree that the combination makes sense, let Gold Fields do due diligence, then negotiate. "I think if we can then go in and do due diligence, firm up the value, then we can have a conversation around value," he said. He also told the newspaper that his discussions with Northern Star began more than a year ago, after Gold Fields picked up a 3.5% stake in the company through its acquisition of Gold Road.

Fraser has said he would walk away if the two sides could not align on value creation. "But that's a step away from where we are today," he said.

A premium that turned into a discount

Gold Fields proposed 0.3125 new Gold Fields shares plus A$7.25 in cash for each Northern Star share. According to Northern Star, the proposal arrived on Sept. 14 and was worth A$27.00 a share at Gold Fields' Sept. 11 closing price, a 22% premium, giving an implied equity value of A$38.7 billion. About 73% of that value came in Gold Fields stock, so the offer rises and falls with Gold Fields' share price. By Sept. 25, Northern Star said, the implied value had already slipped to A$25.19 a share.

The gap has widened since. By Thursday, Northern Star's shares were up 10% from the day before the approach became public, while Gold Fields' shares had fallen nearly 17% over the same period. "At current market values, the Gold Fields proposal is now at a discount to Northern Star's share price," Northern Star chairman Michael Chaney said.

That is the practical obstacle for Gold Fields. Because the offer is mostly paper, its own falling share price has erased the premium, so any revised bid would have to make up that lost ground before it could offer Northern Star holders anything more.

Northern Star has not moved

Northern Star's board unanimously rejected the proposal in September. It said the bid materially undervalued the company and was "highly opportunistic" because it came just before the commissioning and ramp-up of the Fimiston Mill and the arrival of new chief executive Suresh Vadnagra, who was due to start on Oct. 5. The board also objected to the large share component, which it said would expose its holders to jurisdictional and operational risks, and to conditions that included a request for "hard" exclusivity with no fiduciary out.

Northern Star said in a statement on Thursday that its board remained focused on acting in shareholders' best interests. "This includes engaging with parties on proposals that represent value above what we believe Northern Star can generate as a standalone company. The Gold Fields proposal was not in that category," it said.

The pitch to investors

The newspaper reported that slides shown at the investor briefings presented a combined Western Australian operation as a production hub able to rival Barrick and Newmont's Nevada Gold Mines joint venture in the U.S. and Agnico Eagle's Abitibi hub in Canada. A merged company would be the world's second-biggest gold producer after Newmont, would control eight of Australia's 20 biggest gold mines, including Northern Star's Super Pit in Kalgoorlie, and would produce 4.1 million ounces a year. Gold Fields has put the synergies at $4 billion to $5 billion, mostly from tax benefits and from combining operations.

Fraser also argues that a merged company would earn a higher valuation. Gold Fields trades at 3.5 to four times enterprise value to earnings before interest, tax, depreciation and amortization, against seven to eight times for Northern Star. "We absolutely believe that this combined business would be trading at a much higher relative multiple than what we're trading at today," he said.

Two shareholders pulling in different directions

Elliott Investment Management, which holds about 6% of Northern Star and has pushed the board to consider a sale or asset divestments, is one holder Gold Fields wants on its side. Fraser has met the activist and said it was focused on a short-term outcome. "They've got an important role, but they're not long-term shareholders," he said. Elliott had no immediate comment.

At home, Gold Fields' largest shareholder, the Public Investment Corporation, which owns 15%, sees the strategic logic of a merger, Fraser said. But he added that some South African investors are worried about cost escalation, the delivery of a turnaround plan at Northern Star and the risk that Gold Fields overpays. The PIC said it did not wish to publicly express a view on a potential merger.

That leaves Fraser little room. Winning over Northern Star's holders would likely take a higher price, since the offer now sits below the market value of their shares, while some of his own South African investors are wary of paying too much.

What investors had expected

After the rejection, investors briefed by Gold Fields said they expected it to improve its offer, most likely with more cash, after an Australian roadshow then planned for late October. A source familiar with the process said at the time that no decision had been made. Gold Fields brought the roadshow forward, and Fraser spent last week on it, but so far he has offered investors the strategic case rather than a new number.