Metallica Resources, New Gold and Peak Gold unite in Axis of Equals

Question: What do you get when three junior gold producers jump into bed together? Answer: A globally diversified intermediate gold company with a market capitalization of about US$1.6 billion.

At least that’s what Metallica Resources (MR-T, MRB-X), New Gold (NGD-T, NGD-X) and Peak Gold (PIK-V) are banking on following their proposed merger.

The new entity to be christened New Gold will own three operating gold mines in Australia, Brazil and Mexico and have a robust balance sheet to pay for the development stage projects in Canada and Chile, including the New Afton mine, which is scheduled to move into production in late 2009.

The board of directors at Metallica Resources, New Gold and Peak Gold have all unanimously supported the deal, calling it a “compelling combination.”

“When I looked at the valuation of intermediate gold producers the likes of RandGold and Yamana [among others] they trade for approximately two times NAV and close to twenty times cash flow,” Pierre Lassonde told analysts and investors on a conference call today. “Yet you look at the junior producers including companies like Metallica, New Gold and Peak, and they trade at less than half to two thirds of that value.”

Lassonde, who is currently the chairman of Franco Nevada Corp. and will own about 5% of the new entity as well as become a director on the board, added there were five key elements for the higher valuations.

Intermediate gold companies he pointed out produce in excess of 300,000 oz. of gold with low cash costs. They are also diversified, have good growth profiles, solid balance sheets and excellent management.

“When you put it all together the intermediate producers have a market capitalization above US$1.5 billion, which is the sweet spot where large institutions find the liquidity that they need to enter gold stocks,” he explained. “Metallica, New Gold, and Peak Gold have one or two of these five elements but only when you put all three companies together do you get it all and you get it in spades.”

The new company will have an estimated gold production of about 297,000 oz. this year, and that figure is forecast to increase to 335,000 oz. in 2009. Cash costs are estimated to come in at about US$340 per oz. gold, net of by-product credits in 2008.

Moreover the company, which will have about US$500 million in cash and short-term investments (including the potential cash proceeds from the exercise of in-the-money options and warrants), as well as $120 million in investments, and significant operating cash flow, will be able to develop its New Afton and El Morro projects and explore the combined company’s extensive land holdings.

The combined company will have roughly 235 million common shares issued. It will also have proven and probable gold reserves of 3.2 million oz., a measured and indicated gold resource of 4.9 million oz. and an inferred gold resource of 3 million oz.

Silver and copper reserves are also prominent in the mix. New Gold will boast a probable silver reserve of 65.3 million oz. and a measured and indicated silver resource of 15.8 million oz. In addition there will be an inferred silver resource that will tally 2.6 million oz.

As for copper, proven and probable reserves come in at about 986 million lbs, measured and indicated resources 2.5 billion lbs and inferred copper resources 918 million lbs.

Under the proposed deal, shareholders of Metallica Resources will receive 0.9 of a common share of New Gold for each common share they hold of Metallica Resources. Based on the closing price of New Gold shares on March 28, the trading day prior to the announcement of the transaction, the offer values Metallica Resources at US$751 million on a fully diluted in-the-money basis. That is a premium of 12.7% to Metallica Resources’ March 28 closing price.

Peak Gold’s shareholders will receive 0.1 of a common share of New Gold for each common share they hold of Peak Gold. Based on the closing price of New Gold shares on March 28, the offer values Peak Gold at US$622 million on a fully diluted in-the-money basis. This represents a premium of 14.9% to Peak Gold’s closing price on March 28.

The deal remains subject to regulatory approvals and a minimum of two-thirds shareholder approval.

Robert Gallagher, the current chief executive officer of Peak Gold, will take over the same role as head of the new company.

The board will be made up of mining heavyweights Clifford Davis, Robert Gallagher, Pierre Lassonde, Craig Nelsen, Paul Sweeney and Ian Telfer.

News of the merger drove up the share prices of all three companies. Metallica gained 43 per share (7.7%) to close at $6.03 on a trading volume of 26.2 million. New Gold rose 14 per share (2%) to $7.15 with 7 million shares changing hands and Peak Gold climbed 7 per share (11.5%) to 68 a share on a trading volume of 34.3 million.