The company has never made any secret of its plans for expansion, but the revelation this week that it tabled a C$2bn bid to the board of Canadian giant Centerra (TSE:CG) is a clear statement of intent.
The offer was ignored by Centerra, and has subsequently lapsed, but perhaps what the market should really be taking note of isn’t the chutzpah of the Chaarat board in tabling the offer, but their absolute confidence that they would have been able to get the deal funded.
As it stands, Chaarat is capitalised at around £90mln in London. Centerra’s C$2bn price tag is therefore quite a stretch.
But of course, it all depends on who you are, and who your backers are. Chaarat’s chief executive Artem Volynets has put together many such deals in the past.
“It’s a classic leveraged buyout,” he says.
“In my experience of doing transactions in this space – and I’ve done quite a few – there is always money available for a good transaction. And Centerra represents a classic breakup story if we buy it even at a very significant premium it’s probably still going to be below the net asset value.”
The reason for that is simple: Centerra has what Volynets calls a “poison pill”, an asset in the Kyrgyz Republic. In fact, the Kumtor mine is a very viable asset, and in the past, Chaarat has expressed interest in acquiring it directly from Centerra. The problem isn’t with the asset, it’s with the way the market values operations in Central Asia.
And this is Chaarat’s whole raison d’ȇtre. The company’s stated aim has for some time been to build an asset suite of significant scale focussed on Central Asia. Chaarat argues that the valuations are cheap and that consolidation will address that issue.
More to the point, the company is now staffed by senior and experienced mining industry executives with extensive experience in the region, both on a corporate and on an operational level.
Chaarat is serious about making Central Asia work, and about deriving attractive valuations from that work, something Volynets argues Centerra has thus far not been able to do with Kumtor. Centerra’s North American assets, he says, could be sold at a premium, it’s just Kumtor that’s the issue.
“Any sophisticated investor will understand that we can make a very significant return here in a very short time,” he says.
And he speculates that the only rational reason Centerra has rebuffed the Chaarat offer without even considering it is that it must have an alternative plan. Accordingly, he is encouraging Centerra shareholders to enquire of their board just exactly what that plan is.
After all, the 35% premium that Chaarat was offering is not to be sniffed at. One argument that might come from the Canadian side is that the disparity in valuations between the two companies is unbridgeable.
But this, says Volynets, won’t stand.
“It’s just a question of financial engineering,” he says.
The leveraged buyout is as old as the financial hills, and in any case, Chaarat has offered Centerra sight of the financial arrangements that it would make in the event that a deal gets done. At the heart is funding to be derived from Middle Eastern investors, including sovereign wealth funds, as well as backers in Hong Kong.
It’s this Middle and Far Eastern firepower that lies behind Volynets confidence in Chaarat’s ability to do deals, and why he’s currently got another 10 or 12 in the pipeline.
The time to do it is right, he says, pointing to the similarities between two recent deals.
“The consolidation of the gold sector is happening,” he says.
“Barrick is buying Randgold, and Chaarat is buying Kapan. The key difference isn’t the size of the transaction but their relative valuations.”
Thus Barrick is paying around 8.7 times EBITDA for Randgold, while Chaarat is paying just two times EBITDA for Kapan.
“The variation is important,” says Volynets, “because it underpins what we’ve been saying, that we can do accretive transactions. We know how to do acquisitions quickly and efficiently.”
The Kapan deal takes Chaarat’s own reserve base to over a million ounces and its resource base to upwards of 9mln ounces.
But it’s only the start. With the firepower Chaarat is beginning to demonstrate, Centerra shareholders will have much to ponder. And they are not the only ones.