AurionGold rejects Placer’s cash-sweetened bid

Vancouver — Directors of Australian miner AurionGold are sticking to their guns and advising shareholders to reject a revised, hostile bid from Placer Dome (PDG-T).

With falling gold prices knocking Placer Dome’s shares down by 40% over the past six weeks, the major finally caved in and added A35 per share in cash to its all-stock takeover bid.

Placer’s original offer, tabled on May 27, valued AurionGold at A$4.51 per share, but by July 31, Placer shares had sagged to US$8.55 each, generating an offer price of A$3.10 — below the A$3.48 level at which the AurionGold shares were trading just before the takeover offer.

The sweetener adds US$84 million in cash to the original bid of 17.5 Placer shares for every 100 AurionGold shares. At July 31, the value of AurionGold on the Australian Stock Exchange was A$3.06 per share.

AurionGold had similarly advised shareholders to reject Placer’s earlier bid, stating that the all-stock deal was too low and volatile given changing market conditions. The rejection forced the major to extend the closing date of the offer, twice. The latest deadline is Aug. 7.

In its latest response, AurionGold cites additional reasons for rejecting the bid. In particular, it points out that:

• the deal brings new risks to AurionGold shareholders in light of leaked reports that the South African government is proposing to seize large interests in mining projects in that country and place them into black hands; and
• Australian shareholders will lose franking credits on dividends, will be subject to Canadian withholding taxes of 15% on dividends, and will likely see a drop in dividends on a percentage basis.

AurionGold notes that its board will meet on Aug. 12th to complete the company’s accounts for the fiscal year ended June 30, 2002, and to consider declaring a fully franked dividend to shareholders.

On the other side, Placer’s chief executive officer, Jay Taylor, comments that, throughout the offer, “there has been unusually high volatility in gold equity markets and equity markets generally,” and that “all the gold producers have been affected by this volatility.

“Placer Dome has listened to the issues raised by the market and provided additional certainty to the offer by adding a cash component and making the offer consideration final and the offer unconditional,” he says.

Despite lifting the condition that 50.1% of AurionGold shareholders accept the offer, the major remains optimistic about receiving more. “We still hope to move to 100% ownership of AurionGold,” says Taylor.

AurionGold’s major shareholder, with a 9.8% stake, is South African-based Harmony Gold (HGMCY-Q), which looked favourably upon the original offer and, naturally enough, has agreed to accept the revised offer.

“In our view, the terms of Placer Dome’s offer are attractive and represent fair value for AurionGold,” says Harmony’s chief executive officer, Bernard Swanepoel.

According to Placer, a review of AurionGold’s revised debt and hedging positions, along with an increase in estimated reserves, propelled the company to increase its offer. Since the original bid was announced, AurionGold has upped its reserves to 7.7 million oz. from 6.1 million oz., while resources ballooned to 25 million oz.

“We believe the transaction remains accretive for Placer Dome on a cash-flow-per-share and net-asset-value-per-share basis, under the revised offer terms,” states Taylor. “It just makes sense for us to get together — we’re the logical buyer, and the fact that there has been no interloper speaks volumes in itself.”

AurionGold was assembled in December through a US$425-million merger of Delta Gold and Goldfields, two medium-size mining houses. Delta brought to the table 100% of the Kanowna Belle, Golden Feather and Wirralie gold mines, as well as a 40% stake in the Granny Smith mine. Goldfields added the Paddington and Kundana mines in Western Australia, the Henty mine in Tasmania, and a 25% interest in the Porgera mine in Papua New Guinea.

The takeover would give Placer Dome full ownership of the rich Granny Smith mine and lift its half-ownership in Papua New Guinea’s Porgera mine to 75%.

Restless natives

At Porgera, gold production has been halted since July 16, owing to what the joint-venture partners term the “election-related vandalism” of the power grid from the Hides gas field in PNG’s Southern Highlands.

The partners say the power pylons require frequent repairs and that threats are being made to the repair crews.

They note that the open-pit and underground operations continue “without major problems” and essential services are being supplied by power from on-site diesel generators.

The partners expect repairs to be completed by Aug. 5, with full production resuming two days later. About 30,000 oz. in gold production will be deferred as a result of the shutdown.

They believe that the “formation of a new government and decisions about the fate of the elections in the Southern Highlands will gradually improve the currently unsettled situation.”Placer’s latest financial results may have played a role in the increased bid, as the major saw production drop as a result of depleting reserves at some of its mines.

The gold producer posted a profit of US$42 million (or 13) per share in the second quarter — a considerable jump from the US$33 million (10 per share) in profits tallied in the year-earlier period. Revenues totalled US$276 million, down from US$302 million a year earlier, as lower copper prices and a decrease in production were offset by the higher gold prices.

The company produced 670,000 oz. gold in the recent quarter at a cash cost of US$181 per oz., down from 747,000 oz. produced at a US$173 per oz. a year earlier. The shortfall was caused by the closure of the Kidston mine in Australia in 2001 and the winding-down of production at both the Golden Sunlight mine in Montana and the Misima mine in Papua New Guinea.

The Granny Smith mine remains Placer’s star performer, having contributed 155,000 oz. gold in the first half of the year, up 58% from the 98,100 oz. recorded in the first six months of 2001. Also boosting Placer’s bottom line were the La Coipa mine in Chile, where production amounted to 43,500 oz., up 52% from 28,600 oz., and the 50%-held South Deep mine in South Africa, where production rose 11% to 89,000 oz.

“We have one of the strongest balance sheets in the business and the best forward-sales program in the industry, and we continue to generate substantial profits,” states Taylor.

Despite the recent drop in the price of gold, Placer remains on-track to reduce its gold hedge book to 8 million oz. this year. At the end of June, the company had 8.4 million oz. hedged.

Accelerate

“We’ve taken advantage of the recent price dips to try to accelerate the process a bit,” says Chief Financial Officer Rex McLennan. “We’re positive about the gold environment and look forward to bringing the position down over the course of the year.”

During the second quarter, Placer realized an average gold price of US$334 per oz., up from US$305 in the comparable period of 2001.

On the copper front, Placer produced 108 million lbs. during the quarter at a cash cost of US46 per lb., up from 99 million lbs. at US45 per lb. a year earlier. The major’s realized copper price slipped to US72 per lb. from US76 per lb.

Meanwhile, in the Dominican Republic, the Senate has approved an agreement between the Caribbean nation and Placer to develop the Pueblo Viejo gold deposit. The agreement now goes before the nation’s Lower House.

The project, 110 km north of Santo Domingo, contains an existing resource of 34.6 million oz. gold and 204 million oz. silver contained in 544 million tonnes of material grading 1.98 grams gold and 11.7 grams silver per tonne. Placer is considering treating the metallurgically complex sulphide ores using a combination of traditional technology and bioleaching.

“Once approved by the House of Representatives, we’ll begin a feasibility study immediately,” says Taylor.

In the first half of the year, Placer produced 1.3 million oz. gold and remains on target to crank out 2.5 million oz. this year. With AurionGold, the company would become the fifth-largest gold miner in the world, with annual production of 3.8 million oz.