Placer Dome, headquartered in Vancouver, has corporate roots reaching back to 1910, while Toronto-based Barrick’s cost-saving tactics embody the new spirit of gold mining — helping to make it the world’s third largest producer in just 23 years.
If Placer Dome shareholders accept the US$9.2 billion offer, the new company would overtake
The Barrick offer of US$20.50 a share in cash or 0.75 of a Barrick share plus US5 per share in cash is 24% above Placer Dome’s US$16.50 closing price on Oct. 28 on the New York Stock Exchange. Barrick needs approval from 66% of Placer shareholders, who have 35 days from the mailing of the offer to accept or decline it.
Ron Coll, a Toronto-based analyst with Jennings Capital, says the US$20.50-per-share price is at a premium to his calculation of Placer Dome’s net asset value (NAV), but that the premium, at only a “couple of bucks,” isn’t significant. Coll says much of that premium is due to the accretive nature of the acquisition and goodwill.
In a conference call on Oct. 31, Greg Wilkins, Barrick’s president and chief executive, said the merger would result in more than US$200 million in savings from transaction “synergies.” More specifically, Wilkins cited reduced energy costs, lower inventory levels, consolidation of exploration targets, improved purchasing leverage and the elimination of some offices, as well as the sharing of shipping costs.
The hostile bid comes on the heels of strong third-quarter results for Barrick.
Wilkins described the quarter as “the watershed quarter” in a conference call after the results were released on Oct. 27. The highlight of the quarter was the reduction of cash costs to just US$210 per oz. — which Wilkins says are the lowest for majors — and sales of 1.5 million oz. of gold. For the same period in 2004, cash costs were US$221 per oz. on sales of 1.3 million oz.
Those robust numbers led Barrick to issue a US11-per-share dividend to be paid on Dec. 15 of this year.
Barrick’s vice-president of corporate communications, Vincent Borg, says that while ostensibly, strong third-quarter financials put Barrick in a position to acquire Placer Dome, it was the particulars behind the numbers that led to the takeover bid.
This year saw a dramatic reduction of risk for Barrick with three of four new mines coming into production. Borg says, as such, it is time to “move forward with the next step.”
But even with the increased cash flow from the new mines and a $1-billion line of credit, Barrick still turned to
As part of the deal, Goldcorp has agreed to buy Placer Dome’s Porcupine, Musselwhite and Campbell gold mines in Ontario, the La Coipa silver mine in Chile, and 40% of the Pueblo Viejo gold project in the Dominican Republic for US$1.35 billion.
Borg says Goldcorp was brought in both to make the offer more attractive to Placer Dome shareholders by offering cash, and to ensure the future development of all Barrick projects.
“We have an unrivalled pipeline and we want more-than-adequate cash to develop it,” Borg explains.
But including Goldcorp in the deal isn’t just about securing more cash.
When asked why Barrick didn’t make the offer without Goldcorp in the question period preceding the conference call, Wilkins said the deal with Goldcorp prevents them from making any deals with other companies. That means Goldcorp cannot offer a “white knight” option to Placer Dome in the form of an alternative merger partner.
“We’d rather have Goldcorp as a partner,” Wilkins said. “That requires a compromise once in a while.”
John Ing, an analyst with Maison Placements, says while he doesn’t expect Placer Dome to survive as an independent company, he wouldn’t rule out another suitor coming out of the woods.
“Placer Dome is gone,” Ing says. “That’s the bottom line. Newmont is the logical other suitor, but the likelihood is low.”
Ing cited an increased tax burden for Newmont, the length of time necessary to complete the deal due to stringent Securities and Exchange Commission (SEC) procedures, and the fact that in its offer, Barrick was “not skinny on the price,” as reasons to count Newmount out.
Concludes Ing: “It’s highly probable that Barrick will win.”
The proposed merger raises questions about what Barrick might do with the Cerro Casale property. On Oct. 26, Placer Dome announced an agreement in principle to sell the Chilean property to its partners,
“It’s not an easy project,” Coll says of Cerro Casale, explaining Placer Dome’s interest in selling its stake. “But for Barrick it fits in (with their portfolio).”
As for the hostile nature of the takeover, Wilkins said Barrick had been in contact with Placer Dome’s board in the past but “never had much traction from them.” Wilkins said he spoke with Placer Dome’s chairman, Robert Franklin, on the morning of Oct. 31 to inform him of “what was coming.”
Representatives from Placer Dome say they will not comment on the offer until it has been thoroughly examined.
In the question period after the conference call, Wilkins was keen to convince analysts that Barrick had learned to be more efficient with its acquisitions. Wilkins said Barrick had learned from its takeover of Homestake Mining in 2001 to strengthen regional offices in an effort to ensure a smooth and efficient transition.
“We have management teams in place to immediately move in and take over the management of (the new) assets,” Wilkins said.
Wilkins added that Barrick would work to reduce Placer Dome’s hedge position after a formal review of the company’s hedge book. Barrick has publicly stated it is attempting to reduce its own hedges, which currently stand at 6.4 million oz. Placer Dome has hedged 8 million oz.
The merged company would give Barrick a pipeline of nine development projects and exploration projects in 16 countries.
In Toronto on Oct. 31 — the day the take-over bid was announced — Barrick finished down $2.19 to $29.65 on roughly 10 million shares. Placer Dome was up $3.84 to $23.33 on roughly 18 million shares. Goldcorp was up 90 to $23.76 on roughly 4.5 million shares.
At presstime, Barrick shares finished down another 33 to $29.32 on 3.7 million shares. Placer Dome slid 62 to close at $22.71 on 9.2 million shares, and Goldcorp closed down 46 at $23.30 on 2.3 million shares.
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