2002 marked by further consolidation

It did not feel as momentous as 2000 or 2001, when we saw the creation of several global mining giants, but 2002 was full of smaller-sized mergers, particularly in the precious metals sector.

Among the majors, the merger tally of 2000 and 2001 was truly staggering: Billiton acquired a copper division by buying Rio Algom; Phelps Dodge expanded by taking over Cyprus Amax Minerals; Grupo Mexico snapped up Asarco and assumed control of Southern Peru Copper; Rio Tinto acquired Australian companies North Ltd. and Ashton Mining; Alcoa merged with Alumax and Reynolds Metals; Alcan combined with Switzerland’s Algroup; Newmont absorbed Battle Mountain Gold; BHP and Billiton merged and then bought Dia Met Minerals with cash; Anglo American “debundled” De Beers Consolidated Mines and took it private; Barrick Gold merged with its venerable competitor, Homestake Mining; and Teck combined with its zinc subsidiary, Cominco.

Even the biggest merger of 2002 was really set in motion in mid-2001. In February 2002, Newmont Mining (NEM-N) closed a 3-way, friendly combination with cash-rich Canadian gold-royalty company Franco-Nevada Mining and Australia’s Normandy Mining.

The deal vaulted the “new” Newmont to the status of world’s largest gold producer, at roughly 7.5 million oz. per year, surpassing even AngloGold (AU-N) and Barrick Gold (ABX-T). In terms of reserves, Newmont has more than any company: about 87 million oz.

In the months leading up to the closing, Newmont successfully fought off AngloGold for Normandy in a bidding war that was notable for a surprising attempt at an alliance between AngloGold and Barrick — a relationship that might conceivably be revived in the future.

Meanwhile, in one of the best PR jobs of the year, Newmont has cast itself as one of the industry’s leading “non-hedgers,” even though it already had a small, pre-merger hedge book and then took on Normandy’s large, Australian-dollar-denominated hedges. To the dismay of gold-bug investors, Newmont has since delivered into Normandy’s hedge book instead of closing it off quickly.

(By contrast, AngloGold’s aggressive buying of gold in the open market to close out a large portion of its hedges and Barrick’s announcement that it would deliver half, instead of none, of its production into the spot market did little to alter both companies’ reputations as chronic hedgers. The perception is an important one, since the shares of the “non-hedgers” significantly outperformed the “hedgers” during 2002’s rising gold-price environment.)

The second key merger in 2002 among the golds was likewise tripartite: the proposed US$1.7-billion combination of mid-tier producers Kinross Gold (K-T), TVX Gold (TVX-T) and Echo Bay Mines (ECO-T).

Before the deal could be moved forward (shareholders will meet to vote on it in late January 2003), TVX first had to buy out Newmont’s half-interest in the Newmont Americas joint venture for US$180 million.

Once the deal is closed in early 2003, the “new” Kinross, led by the “old” Kinross’s charismatic president, Robert Buchan, will be notable for three things: its 2 million oz. of unhedged, annual gold production from 12 mines worldwide; the high liquidity of its shares; and the lack of any really stellar gold assets.

Thus, the merged company will nicely fill a niche in the gold market as the leading swing producer, poised to benefit strongly from a rising gold price but still quite vulnerable if prices slide back to under US$325 per oz.

Weird

The award for weirdest takeover of 2002 goes to Placer Dome (PDG-T), which launched a hostile offer in May for AurionGold. The Australian company was, at the time, that country’s largest gold producer, at almost 1 million oz. annually, and held significant gold assets in the Kalgoorlie region (AurionGold itself was formed only in late 2001 through the merger of Goldfields and Delta Gold).

The deal left many observers scratching their heads, since AurionGold was one of the most-hedged companies on the planet in terms of percentage of reserves hedged. Indeed, the market reacted by relentlessly driving down Placer shares at a time when gold prices were buoyant and unhedged gold producers were generally recording double- and even triple-digit share-price gains.

The bid got off to a lousy start: AurionGold’s management rejected the offer, and Placer’s steadily eroding share price (which was exacerbated by the Canadian company’s unexpected ejection from the S&P 500 index in the U.S.) kept making the premium on its all-share offer less and less attractive. At one point in mid-summer, Placer’s share price had fallen a whopping 40% since the bid was first announced.

Over the ensuing months, the reaction among AurionGold shareholders to the bid was lukewarm at best, so Placer was forced to add a cash sweetener. After more than a dozen extensions, Placer finally acquired the Aussie miner in late 2002.

In a perverse way, by acquiring AurionGold, Placer managed to create for itself a unique form of poison pill: any gold major that succeeds in taking over Placer would immediately have the prickly task of dealing with AurionGold’s 5-million-oz. hedge book, on top of Placer’s own 7 million hedged ounces.

It is perhaps for this reason that, despite all the takeover speculation throughout 2002, no company ever tried to acquire Placer. As a result, Placer’s upper-management, widely criticized for such screw-ups as the disastrous Getchell acquisition and the Las Cristinas blow-out, remains in securely in place.

The AurionGold takeover — only the latest of several in Australia — dealt one more blow to Aussie pride, since it left only Newcrest Mining standing as the last major Australian gold producer. Ownership of most of Australia’s prized gold assets has now shifted to the foreign fivesome of Barrick, AngloGold, Gold Fields, Newmont and Placer.

Surprise

Perhaps the most surprising takeover of 2002 was that which involved Norilsk Nickel, the world’s largest producer of both nickel and palladium. In November, Norilsk shattered the reputation of Russian miners as being stay-at-home types by reaching deep into the American heartland and taking control of troubled platinum-palladium producer Stillwater Mining (SWC-N). The Montana-based company is the only producer of platinum group metals in the U.S., and there is some irony in the fact, until relatively recently the Stillwater mine was considered to be of high strategic value to the U.S. government in its Cold War against the Soviet Union.

Norilsk is acquiring 51-56% of Stillwater for US$341-374 million, to be paid in a combination of cash and, curiously, physical palladium.

Stillwater shareholders squirmed at the massive dilution and loss of control, and then headed for the exits, driving shares down 25% after the deal was announced.

Friendly

Beyond the above blockbuster deals, there were 10 significant mergers or acquisitions in the precious metals sector in 2002, and all were of the friendly kind.

o Pacific Rim Mining (PMU-T) and Dayton Mining accomplished an all-stock merger which ensured the advancement of Dayton’s El Dorado high-grade gold-silver project in El Salvador.

o In February, following two years of discussions, Glamis Gold (GLG-T) merged with fellow junior Francisco Gold in an all-share deal that created one of the industry’s leading intermediate gold producers.

Francisco’s promising El Sauzal project, in Mexico’s Chihuahua state, will be the first project developed by the new Glamis.

o Orezone Resources (ORZ-T), one of the few mining companies based in Ottawa, merged with London-listed Coronation International Mining in a deal that combined the former’s five prospective gold properties in Burkina Faso and Mali with the latter’s West African
portfolio. Among Coronation’s assets in the region is the Essakan gold property in Burkina Faso.

o In April, in a widely praised manoeuvre, Meridian Gold (MNG-T) beefed up its asset base by merging with London-listed Brancote Holdings, owner of the high-grade Esquel gold project in the southern Argentine province of Chubut. The all-share transaction valued Brancote at US$300 million.

o This was followed up by the merger of Canadian gold producer Miramar Mining (MAE-T) and junior explorer Hope Bay Gold. The move consolidated the partners’ 50-50 Hope Bay joint-venture — a multi-milion-ounce greenfields gold project north of Yellowknife, near where Miramar operates the Con and Giant mines.

Hope Bay Gold’s French Guiana assets were left out of the merger, and were placed instead into a new company, Ariane Gold (AGD-T). Ariane’s chief asset is the Camp Caiman gold project, acquired as part of Hope Bay’s US$16.4-million purchase of Grupo Mexico subsidiary Asarco Guyane Francaise.

o In September, Denver-based royalty company Royal Gold (RGL-T) agreed to acquire a 93% stake in High Desert Mineral Resources for roughly US$24 million in cash or shares. Royal particularly coveted High Desert’s 2% net smelter return royalty on a large portion of Newmont’s Leeville project in Nevada, which was given the green light for development during the summer, along with Newmont’s neighbouring Gold Quarry South Layback mine.

o October saw Bema Gold (BGO-T) propose a merger with fellow Vancouver junior EAGC Ventures. The latter had just agreed to buy Petrex, South African-based Petra Mining’s holding company, which owns three gold mines known collectively as the “Golden Reefs” in South Africa’s Gauteng province. Bema’s most prominent asset these days is its 79% stake in the high-grade Julietta gold-silver mine in far-eastern Russia.

o Later in October, two of the richest juniors in the gold industry, Iamgold (IMG-T) and Repadre Capital, agreed to merge in an attempt to boost their combined visibility and liquidity, with an eye to convincing the market to value its gold assets using the higher multiples given to larger intermediate gold darlings such as Goldcorp, Meridian Gold, Agnico-Eagle Mines and Glamis Gold.

o The first silver deal of 2002 happened in April, when Wheaton River Minerals (WRM-T) purchased the mining division of Mexican autoparts manufacturer Sanluis for US$75 million. The division comprises three operations that produced a total of 5.8 million oz. silver and 98,000 oz. gold in 2001. As 2002 came to a close, Wheaton was profitable, debt-free and cashed-up, and its revenue stream was split equally between silver and gold.

o The year’s second silver acquisition occurred in May, when Pan American Silver (PAA-T) announced an all-share offer for Toronto-based Corner Bay Silver (BAY-T), which should allow the former to develop the latter’s 117-million-oz. Alamo Dorado silver project in Mexico’s Sonora state. However, the deal’s closing is being held up while Corner Bay acquires water permits necessary for the building of a heap-leach operation at Alamo Dorado.

The largest base metal deal of 2002 was Exxon Mobil‘s (XOM-N) US$1.3-billion sale, in May, of its large Disputada copper operations in Chile to Anglo American (AAUK-Q). Disputada is comprised of the Los Bronces and El Soldado mines and the Chagres smelter.

The sale did not go off without a hitch, however, as Exxon got caught up in a nasty wrangle with the Chilean government over back taxes owed. Exxon eventually paid up and exited the country late in the year.

The second piece of base metal action was the “demerger” in December of Australia’s WMC Ltd. into two separate listed companies. WMC’s 40% stake in an aluminum joint venture with Alcoa (AA-N) was spun off into a new company named Alumina Ltd., and its base metals, uranium and fertilizer assets are maintained under the slightly modified WMC Resources (WMC-N) banner.

The combined value of the two de-merged companies already exceeds that of the old WMC, and there is rampant speculation that either of the two new companies will soon become takeover targets of the major mining houses.

The only diamond merger of any consequence during 2002 was the combination of junior Canadian explorers Diagem International Resource (DGM-V) and Emerging Africa Gold. The new Diagem has diamond prospects in northern Ontario and in the Juina district of Mato Grosso state in southwestern Brazil.

Fording

The year closed with one battle still unresolved: the high-stakes competition to acquire Canadian coal giant Fording (FDG-T), one of five spinoffs from the unbundling of the Canadian Pacific conglomerate in 2001.

Taking advantage of a listless Fording management, Sherritt International (S-T) teamed up with the Ontario Teachers’ Pension Plan in October to offer a 25% premium of $29 for each of Fording’s 51.3 million outstanding shares.

Fording management rejected the offer and countered with a plan to turn itself into a trust unit — that is, until Teck Cominco (TEK-T) and Westshore Terminals Income Fund (WTE.UN-T) appeared as white knights with their own friendly bid, which also involves creating a trust unit out of Fording’s assets.