Questionable Benefits of Yamaha, Meridian and Northern Orion Resources merger

Implications: The Yamaha Gold, Meridian Gold and Northern Orion Resources merger does not result in significant synergies that can help the combined company to reduce production costs over the long-term.  The best mergers in the gold mining business result in unlocking long-term synergies by combining companies who have mineral properties either adjacent to each other or close enough to integrate operations.  Such a strategy can result in significant cost savings over time by sharing processing facilities, labor force, energy sources, mine site infrastructure, etc.  The merger of Yamaha, Meridian and Northern Orion results in very few of these types of synergies.  Yamaha Gold's operations are concentrated in Brazil, Meridian's operations are concentrated in Chile and Northern Orion's operations are concentrated in one property in Argentina.  Cross-border operational synergies are very difficult, if not impossible, to achieve in the mining business.   So what is driving this merger?

Analysis: It is becoming increasingly difficult to discover, develop and bring into production new world class gold mining properties.  As a result, pressure has increased for gold producers to grow or replace their depleting production profiles through mergers and acquisitions.  However, simply combining the property portfolio of one gold mining company with another doesn't necessarily result in sustainable added value over the long-term.   Value-added mergers of gold mining companies usually involve combining companies who share concentrations of their operations in certain "gold belt" regions in the world.   Such transactions have the potential to unlock operational synergies and significantly reduce operating costs.  It is not uncommon for competing gold producers to be working properties adjacent or close to each other.  By combining operations, processing, transportation and other mine site infrastructure can be shared.  In some cases, ore can be blended to optimize production, workforce can be reduced or other operational synergies can be realized due to the close proximity of the operations of each company.  To pursue mergers of this type requires considerable patience and research.

Because the operations of Yamaha Gold are concentrated in Brazil, the operations of Meridian Gold are concentrated in Chile and the operations of Northern Orion are concentrated in one project in Argentina, very few, if any, operational synergies can be created by combining the companies.  Usually, cross border operational synergies are very difficult, if not impossible, to realize due to legal and political restraints.

The primary justification of for the merger according to Yamaha Gold's CEO Antenor Silva is that it creates a company with a significantly enlarged portfolio of properties, reserves and upside potential relative to the gold price and project expansion.  However, the merger lacks significant operational synergies that can drive value in the long run through reductions of production cost.