Metallica, New Gold, Peak Gold to merge

What do you get when three junior gold companies jump into bed together? You get a globally diversified intermediate gold producer with a market capitalization of about US$1.6 billion.

At least that’s what Metallica Resources (MR-T, MRB-X), New Gold (NGD-T, NGD-X) and Peak Gold (PIK-V, PIKGF-O) are banking on with their proposed merger.

The new entity — to be christened New Gold — will own three operating gold mines in Australia, Brazil and Mexico, and have a robust balance sheet to pay for development-stage projects in Canada and Chile, including the New Afton mine, scheduled to move into production in late 2009.

The boards of all three juniors have unanimously supported the deal, calling it a “compelling combination” and a “merger of equals.”

“When I looked at the valuation of intermediate gold producers the likes of Randgold and Yamana (among others) they trade for approximately two times NAV (net asset value) and close to twenty times cash flow,” Pierre Lassonde told analysts and investors on a conference call announcing the news. “Yet you look at the junior producers including companies like Metallica, New Gold and Peak (among others), and they trade at less than half to two-thirds of that value.”

There are a number of reasons why this is so. For one thing, intermediate gold companies produce more than 300,000 oz. gold with low cash costs, explained Lassonde, who will become a director on the board and own about 5% of the new company. They are also diversified, have good growth profiles, solid balance sheets and excellent management.

“When you put it all together, the intermediate producers have a market capitalization above US$1.5 billion, which is the sweet spot where large institutions find the liquidity that they need to enter gold stocks,” he said. “Metallica, New Gold, and Peak Gold have one or two of these five elements, but only when you put all three companies together do you get it all and you get it in spades.”

The new company will produce an estimated 297,000 oz. gold this year, forecast to rise to 335,000 oz. in 2009. Cash costs are estimated to come in at about US$340 per oz. gold, net of byproduct credits, in 2008.

Moreover, the company, which will have about US$500 million in cash and short-term investments (including the potential cash proceeds from the exercise of options and warrants), as well as $120 million in investments, and significant operating cash flow, will be able to develop its New Afton and El Morro projects and explore the combined company’s extensive landholdings.

The new company will have roughly 235 million common shares issued.

In terms of resources, the combined companies will have proven and probable gold reserves of 3.2 million oz., a measured and indicated gold resource of 4.9 million oz. and an inferred gold resource of 3 million oz.

Silver and copper reserves will also add to the mix. New Gold will have a proven and probable silver reserve of 65.3 million oz. and a measured and indicated silver resource of 15.8 million oz. In addition, the company will have an inferred silver resource tallying 2.6 million oz.

As for copper, proven and probable reserves come in at about 986 million lbs., measured and indicated resources at 2.5 billion lbs. and inferred copper resources at 918 million lbs.

Under the proposed deal, Metallica shareholders will receive 0.9 of a common share of New Gold for each share of Metallica.

Based on the closing price of New Gold shares on March 28, the trading day prior to the announcement, the offer values Metallica Resources at US$751 million on a fully diluted basis. That is a premium of 12.7% to Metallica’s March 28 closing price.

Peak Gold shareholders will receive 0.1 share of New Gold for each share of Peak Gold. Based on the closing price of New Gold shares on March 28, the offer values Peak Gold at US$622 million on a fully diluted basis. That represents a premium of 14.9% to Peak Gold’s March 28 closing price.

The deal remains subject to regulatory approvals and a minimum of two-thirds shareholder approval.

Robert Gallagher, currently chief executive of Peak Gold, will take over the same role as head of the new company.

The board will be made up of mining heavyweights Clifford Davis, Robert Gallagher, Pierre Lassonde, Craig Nelsen, Paul Sweeney and Ian Telfer.

News of the merger drove up the share prices of all three companies. Metallica closed up 43 per share (7.7%) at $6.03 on 26.2 million shares traded. New Gold rose 14 per share (2%) to $7.15 with 7 million shares changing hands, and Peak Gold climbed 7 (11.5%) to 68 a share on a trading volume of 34.3 million.