AuRico Gold (AUQ-T, AUQ-N) wants to become an 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 own five operating gold mines, with a sixth targeting first production in the first half of 2012.
And this sixth mine, Young-Davidson, is the key to the deal.
The project’s rich location 60 km west of Kirkland Lake, Ont., earned an early offer this summer from Primero Mining (P-T, PPP-N).
But AuRico’s offer, worth $1.46 billion, won unanimous support from Northgate’s team, which called it “superior” to Primero’s.
Northgate has already paid $25 million to Primero as a break fee.
So what is all the fuss about Young-Davidson?
Timing has much to do with it.
The project sits in a politically stable region, its development is proceeding on time and on budget, it has significant tonnage in reserves, and considerably more could be on the way, thanks to the prospective West zone. And all of this comes during 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 gold per tonne in the open-pit section and between 3.22 grams and 2.92 grams gold in the underground section, for total reserves of 2.8 million oz. gold.
It has another 5.9 million tonnes grading 3.4 grams gold in underground inferred resources for 650,000 oz.
On a conference call, AuRico’s president and chief executive, René Marion, pointed to July 28 drill results from Young-Davidson’s West zone as a key motivators for the deal.
Results were highlighted by 5.3 grams gold over 44 metres and 2.67 grams gold over 193 metres.
If the drills keep hitting such wide intercepts, Marion’s vision – 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.
Marion says the deal could see an increase in the new company’s resources, from 10.3 million gold equivalent oz. to 19 million gold equivalent oz.
He also said production would rise to 475,000 gold-equivalent oz. in 2011 from the current projection of 280,000 oz., and could reach 730,000 gold-equivalent oz. by 2013 after a contribution from Young-Davidson.
And while Young-Davidson is front and centre, Marion didn’t neglect to mention Northgate’s other operating gold mines.
One of the first challenges AuRico will have, should its takeover attempt be successful, will be to drive down costs at Northgate’s Fosterville and Stawell gold mines in Australia.
“Gold-operating assets are tough to find,” Marion said. “When you’re sitting here at record gold prices, you definitely want to
optimize the Australian assets, 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 lowering costs in Australia show investors the merits of the deal, but the one issue that investors want to see addressed in any merger is that of synergies.
On that front, AuRico says it would realize “significant” synergies through a larger tax-loss pool by general and administrative, operating and equipment costs.
As for the logistics of running the merged company, Marion said that for the first year, it would run as two subsidiaries with AuRico’s current team maintaining control of the Mexican assets, and the Northgate team continuing to drive development of Young-Davidson.
Marion would remain chief executive and the board would be made up of three members from Northgate and six from AuRico. AuRico’s Colin Benner would remain chairman.
The combined company would be unhedged, with $346 million in cash and equivalents.
Under the deal, AuRico would acquire all of Northgate shares on the basis of 0.365 AuRico shares per Northgate share, or a 45% premium based on the 20-day volume-weighed average price of Northgate shares.
Current Aurico and Northgate shareholders would hold 62% and 38%, respectively, of the merged company, which would boast a market capitalization of $3.2 billion.
Responding to AuRico’s bid, Northgate has postponed its shareholders meeting from Sept. 21 to an undetermined date in October.
AuRico shareholders will meet on the same date as Northgate’s meeting.
For the deal to go through, it must be approved by over half of AuRico shareholders, and 66.6% of Northgate’s shareholders.
In May 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 and its Mexican gold mining assets.
That takeover came with a fight – Gammon warded off rival Timmins Gold (TMM-T) to win the deal.
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