New Gold to buy Richfield for $550M

Richfield Ventures (RVC-V) has capped an impressive rise by agreeing to be snapped up by New Gold (NGT-T, NGD-X) in an all-share deal that values the junior at $550 million.

New Gold is offering 0.9217 of a New Gold share for each Richfield share, which works out to be $10.38 per Richfield share and represents a 31% premium to its April 1 closing price and a 46% premium based on each company’s 20-day volume-weighted average price. That values Richfield at $513 million.

For New Gold, the deal would have it gaining Richfield’s promising but early stage Blackwater gold property in central British Columbia. Richfield announced an initial resource in early March, establishing 53.5 million indicated tonnes grading 1.06 grams gold per tonne for 1.8 million oz. gold, plus 75.5 million inferred tonnes at 0.96 gram gold for a further 2.3 million oz. The deposit is still open laterally and at depth and a scoping study is expected later this year.

While the takeover comes at a very early stage for Blackwater, several companies had entered
into confidentiality agreements
last summer to look into the possibility of buying the company. New Gold executive chairman Randall Oliphant said in a conference call that the company had been in
negotiations and due diligence for 10 months before the deal went through.

For Richfield, the New Gold offer turned out to be the best one.

“I think New Gold’s offer is by far the most compelling and clearly advanced,” said Richfield’s president and CEO Peter Bernier on the conference call, “which is why we locked up with the New Gold offer.”

For Bernier, the deal marks a major success for his first foray as head of a public mining company, having started Richfield in 2007 and optioned into the Blackwater project in 2009. Oliphant noted on the call that Bernier “founded the company by mortgaging his home, and today has delivered a half billion dollars of value to his shareholders.”

New Gold can now bring Blackwater to the next stage faster with the help of much deeper pockets, though company executives said production was likely five or six years away.

Plus, with operations in the United States, Mexico and Australia and development projects in Chile and B.C., Blackwater is not first in line for New Gold.

“We didn’t need to do this Richfield deal,” said Oliphant. “We were only going to do something if we found it to be compelling because… we’re pleased with where New Gold was.”

But with plans to put its New Afton gold-silver-copper mine near Kamloops, B.C., into production in 2012, New Gold sees a smooth transition for its team to another development project nearby. Plus, by continuing with development work in B.C., the company estimates it can defer roughly $150 million in taxes by three more years.

Scotia Capital analyst Trevor Turnbull wrote in a research note that “we heartily approve of New Gold’s decision” due to the continued growth potential of the deposit.

“New Gold seized a rare opportunity that too often goes unpursued by companies in need of acquisitions,” wrote Turnbull. “We believe it is commendable that management identified the potential at the Blackwater project and acted upon it early enough to preserve upside for themselves and their shareholders at New Gold.”

UBS analyst Dan Rollins also approved of the deal, noting that since New Gold’s “pipeline of exploration projects was lacking relative to its peers, the proposed acquisition of Blackwater provides the company with a needed exploration stage project.”

With the project still at an early stage though, both analysts kept their price targets for New Gold, with Turnbull at US$13 and Rollins at US$11. 

The transaction has the full support of both boards, with Richfield directors and officers holding 15.8% of outstanding shares. The deal has an $18-million break fee and New Gold has the right to match higher offers, though Turnbull noted that he did not expect any.

New Gold says it is securing Blackwater for minimal dilution. The deal will see about 49 million New Gold shares issued with Richfield shareholders making up about 10.4% of the enlarged company.

Richfield shareholders would benefit from any growth in New Gold, but are also exposed to any downside. New Gold’s Cerro San Pedro gold-silver mine in Mexico has been the subject of several lawsuits, including efforts by the Mexican environmental enforcement agency to shut the mine, with current legal challenges relating to land disputes.

Richfield’s share price was up $1.99 or 25% on the day of the bid to $9.92 on 5.9 million shares traded. The company has climbed from around a dollar last July.

New Gold’s share price fell 43¢ or 3.8% to $10.83 on 4.3 million shares traded. On March 31 the company hit a 52-week trading high of $11.59, having climbed from under $5 last July.