Newmont to merge with Battle Mountain

Newmont Mining (NEM-N) has inked a deal to acquire Battle Mountain Gold (BMG-N), representing the second major merger in the gold mining industry in the past two weeks.

Only days earlier, Toronto-based Franco-Nevada Mining (FN-T) and Johannesburg-based Gold Fields (GOLD-Q) agreed to join forces.

Under the more recent deal, Battle Mountain would become a wholly owned subisidiary of Newmont, with Battle Mountain shareholders exchanging their shares of common stock and preferred shares into shares of Newmont at the rate of 0.105 Newmont share per Battle Mountain share. The exchange rate represents a 25% premium over Battle Mountain’s share price at June 20.

By consolidating the two companies’ land positions in Nevada, the merger is expected to generate cash savings of US$30 million per year. At 2 million acres, Newmont is already the largest holder of mining land in the state. Battle Mountain’s assets represent an additional 32,000 acres, situated southwest of the town of Battle Mountain in Nevada’s north-central region.

The proposed merger is expected to have a major effect on Battle Mountain’s Phoenix project. Battle Mountain had intended to mine 30,000 tons per day, which would then be sent through a mill in order to recover 385,000 oz. gold annually, plus significant copper and silver credits. The Phoenix mill would have employed a system known as SART, an acronym for sulphidization, acidification, recirculation and thickening.

However, under Newmont’s control, the SART option is to be eliminated in favour of a new US$25-million solvent extraction-electrowinning circuit and use of the autoclave at the company’s nearby Lone Tree operation.

The merger will have little effect on production levels at Phoenix, which are projected at 390,000 oz. per year plus 1.35 million oz. silver and 27.5 million lbs. copper. Heap leaching will represent 15% of the annual gold production, and cash operating costs are expected to fall to US$140 per oz. in the first years of operation, or US$150 per oz. over the 13-year life of the mine.

Newmont expects to see savings of US$10 million per year as a result of lower operating costs. During the early years of production, savings could reach US$15 million.

The rest of the cost savings will come as a result of closing Battle Mountain’s office in Houston, Tex., and rationalizing the company’s exploration budget.

Capital costs for the redesigned Phoenix project would remain about US$200 million, though the internal rate of return is expected to grow beyond 20%. Permitting would be completed in 2001, with construction beginning in the following year. Startup is envisaged for 2003.

Phoenix will be one of Newmont’s lowest-cost operations and is expected to lower the major’s total cash costs to US$165 per oz. in 2003.

To complete the transaction, Newmont will issue 24 million shares, bringing its total to 192 million shares. The company will keep Battle Mountain’s preferred stock and convertible debentures in place under identical terms (though under the Newmont name). Newmont would also assume Battle Mountain’s long-term debt of US$200 million. As a result, the overall value of the transaction is pegged at US$800 million.

Battle Mountain shareholders would represent 13% of the combined company, and there are no scheduled changes to Newmont’s board of directors.

Newmont needs a simple majority of Battle Mountain shareholders to approve the deal. Noranda (nor-t), which owns 28% of Battle Mountain, has already agreed to vote in favour of the merger.

Battle Mountain has already begun working on the proxy materials for the transaction, which is expected to close in the fall. In the event that the proposed merger fails, a US$16-million breakup fee has been included in the deal.

The addition of Battle Mountain’s 760,000 oz. gold per year would cause Newmont’s annual production to grow to 5.4 million oz. — in second place behind South Africa’s AngloGold (AU-N), which cranks out more than 7 million oz. annually. Total cash costs would be under US$170 per oz.

Battle Mountain also brings to the table reserves of 9.9 million oz., which will expand Newmont’s reserve picture to 66.5 million oz. — the third-highest in the world, behind AngloGold and Gold Fields. North America will account for 56% of those reserves.

Battle Mountain’s operations include the Golden Giant and Holloway mines in Ontario, the Kori Kollo mine in Bolivia, a half-interest in the Vera-Nancy underground mine in Australia, and a 54% stake in the Crown Jewel gold project in Washington state.

Normandy Mining (NDY-T) operates Vera-Nancy, whereas Crown Resources (CRO-T) controls the remainder of Crown Jewel. Battle Mountain also controls a 9.5% interest in Lihir Gold (LIHRY-Q) and several exploration projects in Argentina and Mexico.

At the completion of the deal, Newmont expects to take a writedown of US$35 million in transaction costs, including legal costs and banking fees.