Model a gold merger: Wedgetail buys Jabiru

The brief

Wedgetail Gold, a listed mid-tier producer with four mines in Western Australia and Nevada, wants to buy Jabiru Gold, a smaller producer with two mines next to Wedgetail’s in Western Australia. The boards have agreed terms: a 30% premium, paid 60% in Wedgetail shares and 40% in cash. Wedgetail will use $280m of its cash and borrow the rest.

You are in the bank advising Wedgetail. Before the announcement the chief financial officer wants the purchase price allocation, the effect on 2026 earnings, cash flow and NAV per share, the synergies that would make the deal neutral to EPS, a contribution analysis, and a table showing how the answer moves with the premium and the share of stock.

Wedgetail Gold and Jabiru Gold are fictional. The figures follow real orders of magnitude.

The assumptions

• The deal closes on 1 January 2026, so 2026 is the first full year together.
• Fair value adjustments go to mineral properties only; Jabiru has no goodwill of its own. The write-up is depleted on a units-of-production basis over Jabiru’s reserves.
• Both companies pay 30% tax. Transaction costs are expensed at closing and left out of 2026 EPS as a one-off.
• The NAV figures are consensus estimates after net debt; the combined NAV ignores the value of synergies.

The steps

1. 1

   Offer price

   What does Wedgetail offer per Jabiru share?

   Hint

   A 30% premium to the $8.00 the shares traded at before the offer.

2. 2

   Equity purchase price

   What is the equity purchase price?

   Hint

   The offer price times Jabiru’s diluted shares.

3. 3

   New shares

   How many new Wedgetail shares are issued?

   Hint

   60% of the price is paid in Wedgetail shares, issued at Wedgetail’s share price.

4. 4

   New debt

   How much new debt does Wedgetail raise?

   Hint

   Wedgetail must pay the cash part of the price and the transaction costs. It uses $280m of its own cash first and borrows the rest.

5. 5

   Deferred tax liability

   What deferred tax liability does the write-up create?

   Hint

   In a share deal Jabiru’s tax base does not change: the write-up raises book value but brings no tax deduction. The liability is that gap times the 30% tax rate.

6. 6

   Goodwill

   How much goodwill does the deal create?

   Hint

   Goodwill is what is left of the price after the fair value of the net assets acquired: book value, plus the write-up, less the deferred tax liability it creates.

7. 7

   Extra depletion

   How much extra depletion does the write-up add in 2026, before tax?

   Hint

   Mineral properties are depleted on a units-of-production basis: the share of reserves mined in the year. Watch the units: production is in thousand ounces, reserves in million ounces.

8. 8

   Pro forma net income

   What is the combined net income in 2026?

   Hint

   Add the two net incomes, then the after-tax effects of the deal: synergies, interest on the new debt, interest lost on the cash used, and the extra depletion. The depletion is not tax-deductible, but the deferred tax liability unwinds with it, so the charge after tax is 70%.

9. 9

   Pro forma EPS

   What is the combined EPS in 2026?

   Hint

   Combined net income over the combined share count: Wedgetail’s 420m shares plus the new ones.

10. 10

    EPS accretion or dilution

    By how much does the deal change Wedgetail’s 2026 EPS? Give a percentage, negative if dilutive.

    Hint

    Compare the combined EPS with Wedgetail’s EPS without the deal: $460m ÷ 420m shares.

11. 11

    Cash flow per share

    By how much does the deal change Wedgetail’s 2026 operating cash flow per share?

    Hint

    Same build as for EPS, starting from the two operating cash flows. The extra depletion and its deferred tax are not cash: leave them out.

12. 12

    Breakeven synergies

    What pre-tax synergies would Wedgetail need in 2026 for the deal to leave EPS unchanged?

    Hint

    Find the net income that keeps EPS at its standalone level with the new share count, compare it with your pro forma net income, and gross the gap up for tax. Then add the $40m already counted.

13. 13

    Jabiru shareholders’ stake

    What share of the combined company will Jabiru’s shareholders own?

    Hint

    The new shares over the combined share count.

14. 14

    NAV per share

    By how much does the deal change Wedgetail’s NAV per share?

    Hint

    Add the two NAVs, take off all the cash that leaves the group (the cash part of the price and the costs), and divide by the combined share count.

Check my answers

Open questions

1. The deal dilutes EPS but adds to cash flow per share. Why, and which matters more for a gold miner?

   Show the model answer

   Two reasons. The write-up adds $62.5m of depletion ($43.8m after the deferred tax credit), a charge that hits EPS but not cash. And Wedgetail pays 20.8x Jabiru’s earnings against its own 18.3x, but only 7.9x Jabiru’s cash flow against its own 8.4x. Gold investors value miners on cash flow and NAV, so the cash flow accretion helps sell the deal; the NAV per share dilution (−2.2%) is what shareholders will question.

2. Why does paying more in cash reduce the dilution, as the sensitivity table shows?

   Show the model answer

   Each way of paying has a cost in earnings. New debt costs 4.55% after tax (6.5% × 70%). Shares cost Wedgetail’s earnings yield, 5.5% (1 ÷ a 18.3x P/E). Jabiru brings an earnings yield of 4.8% at the offer price. Debt is cheaper than what Jabiru earns, shares are dearer, so every dollar moved from shares to debt helps EPS. The limit is leverage: at the base mix net debt is 0.93x EBITDA; an all-cash deal would take it to 1.88x for a business exposed to the gold price.

3. Use the contribution analysis: is a 30% premium fair to Wedgetail’s shareholders?

   Show the model answer

   Jabiru brings 25.0% of the combined production, 26.7% of the reserves, 24.8% of the operating cash flow and 23.9% of the NAV, but only 21.4% of net income and 19.2% of market value. Paid entirely in shares, the offer would give Jabiru’s holders 23.6%. That is a little below what Jabiru brings in ounces, cash flow and NAV (24% to 27%), and above its share of earnings and market value: Wedgetail pays for reserves and cash flow, not for earnings. On these numbers the premium is defensible for Wedgetail’s shareholders, not cheap.

4. Why does the write-up create goodwill, and what would change in an asset deal?

   Show the model answer

   In a share deal Jabiru keeps its old tax base, so the $1,000m write-up has no tax deduction behind it. IAS 12 and ASC 740 then require a $300m deferred tax liability, which lowers the net assets acquired and raises goodwill by $300m. In an asset deal (or with a US section 338 election) the buyer gets a stepped-up tax base: no deferred tax liability, $300m less goodwill, and depletion that is tax-deductible, worth about $18.8m of cash tax in 2026. The seller usually pays tax on the gain, so the price reflects that.

5. Which accounting points would you flag under IFRS and US GAAP?

   Show the model answer

   Both IFRS 3 and ASC 805 expense the $40m of transaction costs and use the acquisition method, with assets at fair value. Goodwill is not amortised under either; it is tested for impairment at least once a year (US private companies may elect to amortise it). Depletion runs on units of production: US filers generally use proven and probable reserves only, while some IFRS miners also include resources they expect to convert, which spreads the write-up over more ounces and lowers the yearly charge.