Homestake set to acquire Plutonic

T’is the season for bargains, thanks to low gold prices, and Homestake Mining (HM-N) has been out doing some last-minute Christmas shopping in Australia. The company has announced that it intends to acquire Australia’s Plutonic Resources in a stock swap valued at US$640 million.

The proposed merger calls for Homestake to issue to Plutonic shareholders 64.3 million new shares on a 0.34-for-1 basis. The deal was met with a unanimous thumbs-up vote by each company’s board of directors.

The offer represents a premium of 86% over the closing price of Plutonic prior to the announcement. Australian gold stocks have suffered more than those of North American producers, making the acquisition that much more attractive to Homestake, said a company release.

Although the market price of a single Plutonic share before the announcement was A$2.80, the Homestake proposal values each Plutonic share at $5.20 each The transaction will create North America’s third-largest gold producer, behind Newmont Mining (nem-n) and Barrick Gold (abx-t), and Australia’s second-largest gold producer, behind Normandy Mining.

Homestake will have 18 mines (10 underground and eight surface mines) in Australia, the United States, Canada and Chile, as well as more than 210 million outstanding shares.

Under the deal, Malaysia Mining, which owns a 36% stake in Plutonic, would become the expanded Homestake’s largest shareholder, with more than 10%.

Benefits to shareholders of Homestake will come quickly, the company said.

The acquisition will accrue to Homestake’s 1998 cash flow and operating results before a one-time US$11 million transaction charge.

“This is a compelling combination, one which helps secure Homestake’s place in the top tier of the world’s leading gold producers,” said Jack Thompson, president of Homestake.

Plutonic’s chairman, Paul McClintock, also said he likes the deal. “This is clearly the right step for our shareholders in a consolidating industry,” he said.

Plutonic is currently Australia’s third-largest gold producer, cranking out 550,000 oz. at a cash cost of US$275 per oz. this year. Although that cost is high in light of the gold price, the company expects decreases in production at older, higher cost mines, which are likely to close in the next few years. Taking their place will be new, lower-cost mines, including the Centenary deposit, which is adjacent to the Darlot mine in the state of Western Australia.

Discovered in 1996, the Centenary deposit contains proven and probable reserves and resources of 7 million oz. Exploration potential there is said to be good.

By 1999, the deposit, which is currently being developed as an underground operation, is expected to add 152,000 oz. gold to the production at Darlot at a cash cost of US$175 per oz.

Plutonic’s holdings of 2.2 million oz. of proven and probable reserves will increase Homestake’s current reserve inventory of 20.4 million oz. by 11%.

Plutonic’s resources stand at 8.5 million oz., which will increase Homestake’s current gold resource of 13 million oz. by 65%.

In all, Plutonic operates five gold mines, each of which is situated in Western Australia. Plutonic’s namesake mine will become Homestake’s second-largest operation, behind its own namesake mine in South Dakota. The Plutonic mine is expected to produce 320,000 oz. gold per year at a cash cost of US$195 per oz. over the next five years.

After completing the acquisition, Homestake expects 1998 gold production to increase by 450,000 oz., to 2.5 million oz.. Production in Australia alone next year could be as high as 850,000 oz. Production in 1999 is expected to increase by 600,000 oz., to more than 2.5 million oz., 1 million ounces of which would originate in Australia.

Homestake’s cash costs, when those at Plutonic’s operations are factored in, will average US$225 per oz. in 1998. Over five years, cash costs are anticipated to be US$227 per oz., Thompson said.

Over the next five years, up to 75% of Homestake’s earnings will be generated by Plutonic’s operations, and its Australian operations will provide 40% of its cashflow.

Plutonic also brings 6,000 sq. miles of prospective Australian mineral lands to the deal.

Homestake also expects to save US$20 million by combining its own Australian operations and exploration with those of Plutonic.

Although Plutonic shareholders would own 30% of the new company, Homestake has not yet discussed any possible changes to its board of directors.

The transaction is subject to approval by the shareholders of both companies, as well as regulators. Homestake expects to close the deal by April 1998.

The deal comes 11 days after Homestake dropped its proposed US$110-million acquisition of the Troilus gold mine in Quebec. Homestake had planned to acquire a 51% interest in the mine, along with 50.6%-owned subsidiary Prime Resources (PRU-X).