Ocampo, meet Young-Davidson

AuRico Gold (AUQ-T, AUQ-N) wants to be the world’s next significant intermediate gold producer, and it has tabled a rich, all share offer for Northgate Minerals (NGX-T, NXG-X) to help it get there.

If successful AuRico would end up holding a total of five operating gold mines, with a sixth mine targeting production in the first half of 2012.

And it is that sixth mine, Young-Davidson, that is the key to the deal.

The richness of the project, which lies 60-km west of Kirkland Lake, was enticing enough to lure an offer early this summer from Primero Mining (P-T, PPP-N).

But AuRico’s offer, worth roughly $1.46 billion, won over Northgate’s team which has unanimously supported the deal, labeling it “superior” to the Primero bid.

Northgate will now have to pay $25 million to Primero as part of its break-fee.

So what is all the fuss about Young-Davidson?

Timing has as much to do with it as anything. The project sits in a politically stable region, its development is proceeding on time and on budget, it has significant tonnage already in reserves and considerably more are likely on the way thanks to the prospective West zone….and all of this at a time of historically high gold prices.

Specifically the project has proven and probable reserves of 32.4 million tonnes grading between 1.6 grams and 1.69 grams in the open pit section and 3.22 grams and 2.92 grams in the underground section for total reserves of 2.8 million ounces of gold.

It has another 5.9 million tonnes grading 3.4 grams in underground inferred resources for 650,000 oz.

On a conference call AuRico’s president and chief executive René Marion pointed to recent drill results from the West zone as one of the key motivators for the deal.

Those results were released on July 28th and were highlighted by 5.3 grams over 44.1 metres and 2.67 grams over 193 metres.

If the drills keep hitting such wide intercepts, than Marion’s vision of upping production capacity to between 7,500 tonnes and 10,000 tonnes per day from the current feasibility study plan of 6,000 tonnes per day, could well become reality.

In all, Marion said the deal could see an increase in the new company’s resources from 10.3 million gold equivalent ounces to 19 million gold equivalent ounces.

He also said production would rise to 470,000 oz. in 2011, from the current projection of 280,000 oz. and could reach 730,000 oz. by 2013 thanks to contribution from Young-Davidson.

And while Young-Davidson is, no doubt, the key driver behind the deal, Marion didn’t neglect to mention Northgate’s other operating gold mines.

One of the first challenges the company will have, should its takeover attempt be successful, will be to drive down costs at the Fosterville and Stawell gold mines in Australia.

“Gold operating assets are tough to find,” he said on a conference cal. “When you’re sitting here at record gold prices you definitely want to optimize the Australian asset and we believe that AuRico has a track record of doing so. It wasn’t long ago that cash costs at Ocampo were at US$760 an oz. and last quarter we were at US$340 per oz.”

Unleashing Young-Davidson’s full potential and driving down costs in Australia would go along ways towards showing investors the merits of the deal, but the one issue that all investors want to see addressed in any merger is that of synergies.

On that front AuRico says it will realized “significant” synergies through a larger tax loss pool, by reducing Selling, General and Administrative expenses and by cutting operating and equipment costs.

As for the day-to-day logistics of running the merged company, Marion said that for the first year it would be run as two subsidiaries with AuRico’s current team maintaining control of the Mexican assets, while the Northgate team continues to drive the development of Young-Davidson up in Ontario.

Marion will remain on as chief executive and the board will be made up of three members from Northgate and six from AuRico. The chairmanship of the board will remain with AuRico’s Colin Benner.

The combined company would be unhedged and would have a large coffer of $346 million in cash assets.

As for the nitty gritty of the deal, AuRico would acquire all of Northgate shares on the basis of 0.365 AuRico common shares per Northgate common share – that represents a 45% premium to Northgate’s shareholders based on the 20-day volume weighed average price.

The new offer from AuRico has forced Northgate to push back its shareholders meeting from September 21 to an undetermined date in October. AuRico shareholders will meet on the same date as the Northgate meeting.

For the deal to be approved it will require just over 50% of AuRico shareholder approval, and roughly 66% of Northgate’s shareholder approval.

Back in May of this year Gammon Gold changed its name to AuRico gold as part of its drive to “reposition” itself for a “new beginning and new chapter in the company’s history.”

The move to acquire Northgate comes just four months after the company completed a $420 million takeover of Capital Gold. That takeover also came with a fight as Gammon had to ward of rival Timmins Gold (TMM-T) to win the deal.