As expected,
In mid-November, Newmont announced a friendly merger with Normandy, which was said to provide a 21% premium over AngloGold’s initial bid, based on each company’s then-current share price. Concurrently, it announced a related (also friendly) merger with
Newmont Chairman Ronald Cambre touted the Pacific axis as not only superior but a revitalization of the gold industry. Such views were echoed by President Wayne Murdy and executives of the other two companies, who also stressed a slew of other benefits.
“This is about portfolio diversification,” said Murdy, “and we expect that the new Newmont will be the clear choice of investors seeking upside to gold.”
The 3-way merger would, among others things, make Newmont the world’s largest gold producer — a position currently held by AngloGold.
Not so fast, says AngloGold.
“Since we announced the offer [on Sept. 5] and after the predictable drop in our price, caused largely by arbitrage activity, our share price has performed well,” says Robert (Bobby) Godsell, chairman of the South African major. “We interpret this positive movement as a signal of approval from the market for AngloGold’s strategy.”
He adds: “Our decision to revise the offer comes after a careful review of Normandy’s response statement, including the detailed independent exports report, which values the company at [A$1.48-1.88] per share, together with the information published by Normandy in its September quarterly report.”
The revised offer adds A20 per Normandy share to the original offer of 2.15 AngloGold shares for every 100 Normandy shares tendered. This places a value of A$1.65 on each Normandy share, or 10% more than Newmont’s bid, based on closing prices for AngloGold and Newmont between Nov. 14 and 28.
Since then, share prices in all three companies have changed. At presstime, AngloGold was trading at US$17.36, or 22 lower, Newmont, at US$19.79, or US9 higher, and Normandy, at $13.11, or 91 higher. Normandy is also up on the Australian exchange, where most of its shares are listed.
Based on the documents, AngloGold says three-quarters of the cash sweetener reflects an increase in tangible assets, such as Normandy’s commitment to Australian Magnesium, which was deemed negative exposure before related financing was subsequently raised. The remainder is based on exploration opportunities cited in the independent report.
AngloGold now expects to save US$40 million annually through the merger, or US$15 million more than it had thought. This takes into account a reduced effective tax rate in Australia, by way of an offshore holding account.
For comparison, Newmont expects to realize US$70-80 million in annual after-tax synergies after the first full year of the 3-way merger and as much as US$80-90 million by the end of the second year. The acquisition is expected to be accretive to earnings, cash flow and net asset value.
Risk management
One contentious issue to come to light in recent weeks is hedging. AngloGold will maintain its policy of covering no more than half of the next five years’ worth of production, whereas Newmont plans to unwind its own and Normandy’s book and remain unhedged.
“The hedging debate is both helpful and misleading,” says Godsell. “It’s helpful in the sense that clearly gold sold forward is a contribution to supply, and if you believe that, over time, markets find an equilibrium price between demand and supply, then any increase in supply has to be priced negative to demand.
“What is misleading about the debate is that people have tended to focus on this category of supply and this category alone. To me, the startling indication of this is that new mine production has risen by 54% between 1985 and 2000; newly mined ounces have been a significantly larger contributor to supply, by a ratio of 4 or 5 times, than either hedging or, in fact, central bank selling.”
Godsell goes on to say AngloGold’s strategy over the past five years has been to pursue responsible production, backed by hedging to ensure a measure of revenue and price security. He cites AngloGold’s removal of 4 million marginal or unprofitable annual production ounces from the market as an example of this.
“We are not driven to produce every ounce available, nor to acquire every ounce, which is why we are not particularly concerned with whether we’re the largest ounce producer in the world or not,” he says. “We want to produce at a responsible level that the market can handle.”
Projected price
Godsell expects gold to appreciate in value gradually but maintains that the company will not bet its solvency on a US$350-per-oz. gold price. This value represents the average gold price over the decade in question and is where Franco believes the yellow metal will be in three years.
AngloGold also practises currency hedging, and believes every country carries risk. As an example of the latter, Godsell cites the impact of the California power grid on its 70%-owned Jerritt Canyon mine in Nevada.
“This frankly came as quite a surprise to us . . . and the best thing you can do about risk of that kind of exogenous nature is to diversify [it], and that ought to make your risk profile a lot stronger.”
If anything, the takeover battle has provided AngloGold a venue in which to counter claims it represents a rand-based investment. Godsell notes that the company has traded more shares this year in New York than in Johannesburg and that it has adopted the greenback as its principal currency.
“The vast majority of Newmont’s profits this year have been generated out of Peru, Bolivia, Indonesia and Uzbekistan — that’s the earnings base,” he says. “Our earnings base currently is about fifty per cent South African and fifty per cent from a range of other countries, including the United States, Brazil, Argentina and Australia.”
With Normany, Australia would become AngloGold’s largest single source of earnings. South Africa would be the next-largest, with the others, as a group, representing slightly less. Non-South African operations account for 60% of pro forma operating profits.
For comparison, 70% of Newmont’s pro forma production and reserves are based in North America and Australia.
As far as the South African Reserve Bank goes, Normandy represents AngloGold’s fifth accepted major global transaction. The major has thus far purchased foreign assets valued at US$1.5 billion.
As much as US$234 million is required for the cash component, to be covered by existing credit facilities. Nearly half the amount may be offset by a top-up facility that could see as many as 7 million additional AngloGold treasury shares printed at a discount of 7.5% to market prices.
The new deal also removes previous restrictions and reduces the settlement period to five business days from 30 days. Essentially, AngloGold is willing to accept a minority stake.
“Our offer is free of defeating conditions, which means there are no minium acceptance conditions,” stresses Godsell. “Also . . . once AngloGold shareholders have voted to increase the offer, Normandy shareholders can expect a quick turnaround.”
Indeed, Normandy shareholders who tender their shares by Dec. 17 can expect their AngloGold shares and cash three days later. Moreover, Australian brokers would be entitled to a handling fee of 1-2.5% for deliveries prior to Dec. 11, or the original 0.75% thereafter.
Newmont is contesting the broker’s reward system with the Australian Takeovers Panel — the same group AngloGold lobbied to have the Newmont bid thwarted. Accordingly, all payments are being postponed until the matter is settled.
AngloGold shareholders are scheduled to vote on the revised offer on Dec. 19, eight days before the day’s scheduled closing date. However,
which holds a 53% interest, has given its unconditional support, all but ensuring the deal’s acceptance.
What remains to be seen is whether Newmont will counter AngloGold or even if
As for advantages, Newmont has commitments from Franco and Normandy Chairman Robert Champion de Crespigny, representing 22% of Normandy’s outstanding shares. AngloGold, on the other hand, has already received approval from Australia’s Foreign Investment Review Board.
Notwithstanding the issues, Godsell says AngloGold will not overpay: “We really would be crazy to expand this company at a cost of its ability to generate returns competitive with other sectors and maintain decent earnings and our strong dividend character. We, in the end, are locked in a battle to return a sense of respectability to the gold sector as an investment destination.”
So far, Normandy’s board has advised shareholders to sit tight until a formal recommendation is released. AngloGold mailed its supplementary bidder’s statement to Normandy shareholders on Dec. 3.
Newmont intends to mail its circular by mid-December and close the deal several months later. On Sept. 30, the major had US$90.5 million in cash, US$70 million in short-term investments and US$43 million in other current assets, for roughly US$135 million in working capital.
A break-up fee of US$100 million is payable by Franco-Nevada and A$38.3 million by Normandy.
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