MELBOURNE – Gold Fields could make another run for Northern Star Resources, CEO Mike Fraser said, after the Australian miner rejected a $27-billion takeover offer, with investors expecting it to return with more cash.

Northern Star rebuffed an unsolicited A$38.7-billion ($27.1-billion) buyout proposal in shares and cash from Gold Fields to create the world's second-biggest gold miner, the latest consolidation play in the sector as producers seek scale and longer-life reserves.

"Whilst we see strong merit in the combination with Northern Star, we’ll be very disciplined about how we pursue this opportunity," Fraser said at a conference in Denver on Tuesday.

Investors briefed by Gold Fields said they expected it to improve its offer, most likely with more cash, after an Australian road show in late October, because issuing additional shares would dilute cash flow per share, three people said.

A source familiar with the process said no decisions had been made on raising the offer.

A Gold Fields spokesperson said the road show had been planned before the takeover offer was disclosed, as the company wanted to familiarise Australian investors with its assets.

Investors said it was hard to assess the value of the largely scrip offer from the South African miner as Gold Fields' operations were not particularly well known in Australia.

Gold Fields' shares are trading on an enterprise multiple of 3.5 to 4 times earnings before interest, tax, depreciation and amortisation, much cheaper than Northern Star's multiple of 7 to 8 times. However, the South African miner's five-year average free cash flow yield is 6.9%, well above Northern Star's at 3.1%.

The valuation gap is likely to widen in the next 12 months as Northern Star is set to ramp up output at its Kalgoorlie operations in Western Australia, yielding more free cash flow, said one fund manager.

"I can be convinced on accepting shares. I think it's going to be hard for it to be all cash," the fund manager said, declining to be named because it was against company policy.

"Gold Fields needs to do a deal soon or Northern Star will be too expensive for it in a year's time — assuming Northern Star executes," he added.

'BAPTISM OF FIRE'
Northern Star's rejection of the offer came just ahead of the arrival of its new CEO, Suresh Vadnagra, on October 5.

Vadnagra faces a "baptism of fire" to convince shareholders that Gold Fields' offer undervalues Northern Star and that a stand-alone strategy can offer more value, Barrenjoey analyst Dan Morgan said.

Northern Star's shares rallied as much as 9% on Wednesday to $25.59, which was above the A$23.76 implied value of Gold Fields' rejected offer as of Tuesday's close, reflecting expectations the suitor is not going away.

"If Gold Fields ups the bid as I expect them to, then I would expect Northern Star to reengage," said Jon Mills at Morningstar.

Northern Star declined to comment on expectations that Gold Fields will make another offer.

Besides seeking answers on valuation, investors want details on the $4-billion to $5-billion of ​corporate, operational and portfolio optimisation synergies Gold Fields expects to extract from a ⁠deal. Investors said it appeared that most of the cost savings stemmed from paying less tax on the combined operations.

"We would estimate that tax synergies could be around 60% of identified synergy and not unique to Gold Fields," Morgan said.

Operational synergies centre on two clusters of assets in Western Australia. These include Northern Star's Thunderbox mine and Gold Fields' nearby Agnew operation, along with Gold Fields' St Ives mine and Northern Star's South Kalgoorlie assets.

"Gold Fields believes its proposal offers compelling strategic and financial benefits for both sets of shareholders," it said in a statement, adding it saw future growth coming from the high grade development projects of Windfall in Canada and Hemi in Western Australia.

Another potential obstacle is that generalist investors would probably want a combined company to be domiciled in Australia, given about 70% of revenue would originate there and due to negative perceptions of governance, capital controls and taxation in South Africa, the fund manager said.

Gold Fields has offered a secondary listing in Australia, and said in the statement, "If the deal were to proceed, the combined company would be a truly global business with listings in Australia, the United States and South Africa."

Two people pointed to the possibility of a rival bidder emerging. In a June letter responding to activist investor Elliott, Chairman Michael Chaney said Northern Star had received approaches from "multiple companies" regarding "various corporate combinations", although none was judged to be in shareholders' interests at the time.