Placer Dome expected to rebuff Barrick bid (November 01, 2005)

Vancouver — The board and management of Placer Dome (PDG-T, PDG-N) are hunkered behind closed doors, discussing strategy on how best to respond to an unsolicited takeover bid by Barrick Gold (ABX-T, ABX-N). While Placer is refusing comment for the time being, this west-coast city seems to be betting that silence will not be the company’s sad reply. Most expect the company to battle for its independence and survival, or failing that, find another suitor willing to pay a better price.

Barrick’s US$9.2-billion takeout offer has sent tremors through the city’s close-knit mining community, which is heavily concentrated in a few blocks surrounding Placer’s corporate offices. If Barrick prevails, the city will no doubt lose another corporate head office. Job losses are expected to follow, and a company that was an integral part of the city’s mining industry since 1926 will disappear.

Sentiment aside, the smart money seems resigned to the fact that in this bull market for gold, stronger companies will relentlessly cull weaker companies with assets worth coveting. It hardly matters if the weakness is real or perceived.

Placer Dome has been criticized for ill-fated acquisitions in recent decades, notably the low-grade Mount Milligan copper-gold project in B.C., and the geologically erratic Getchell gold project in Nevada. Analysts have also criticized the South Deeps acquisition in South Africa, the low-grade Cerro Casale project in Chile (since returned to two partners), and Placer’s high production costs, relative to its industry peers.

While the company has paid the price in the market for its missteps, it can be argued that it hasn’t received much credit for its many accomplishments, including impressive discoveries near the 60%-owned Cortez mine complex in Nevada. The Pipeline and South Pipeline deposits and the Cortez Hills and Pediment deposits (more than 15 million oz. in reserves) likely top the list of assets coveted by Barrick, and possibly other suitors. Barrick made its name and fortune in Nevada, as did rival Newmont Mining (NMC-T, NEM-N), and these two companies are the most logical contenders for Placer’s Nevada assets.

Placer’s assets in Africa and Australia are also of interest to rival gold companies, particularly Barrick, as they allow for synergy-driven cost savings and improve the odds of reserve replacement.

Newmont is a possible contender to emerge as Placer’s “White Knight,” but Barrick already has the home-court advantage in that Goldcorp (G-T, GG-N) is willing to shell out US$1.35 billion in cash to acquire some of Placer’s smaller assets. This makes the takeover easier and cheaper for Barrick, tougher for any new contender to beat, and harder for Placer Dome shareholders to resist.

While Placer Dome is expected to rebuff Barrick’s offer on the grounds that the price doesn’t adequately reflect the true value of its assets, Barrick has repeatedly stated that its offer is “fair and final.” Both companies are well aware that some recent merger proposals were never consummated, even despite best-laid plans and the approval of high-powered analysts.

The final outcome of this top-tier battle is anyone’s guess, but the prevailing view from Vancouver seems to be that if a company of Placer’s stature must go down, it should not go down easy.