Newmont trumps bid by AngloGold

The takeover battle for Normandy Mining (NDY-T) has entered a new round, with Newmont Mining (NEM-N) countering AngloGold‘s (AU-N) latest bid by offering twice as much cash.

Newmont is now offering an unconditional A40 per share, in addition to 3.8 shares for every 100 Normandy shares. Before AngloGold sweetened its all-share bid with a bonus of A20 per share, Newmont was offering A5 per share if more than 90% of Normandy’s shares were tendered (T.N.M., Nov. 19/01).

“The revision means that now both the stock and cash portions are indisputably and significantly superior [to the AngloGold bid],” says Newmont President Wayne Murdy. “We have taken this step without sacrificing the other significant economic and strategic advantages that the Newmont offer has enjoyed from the day it was launched.”

He chalked up the need for such a sizable increase to the timing of AngloGold’s offer in relation to arbitrage activity. AngloGold’s bid closes on Dec. 27, whereas Newmont is aiming for mid-February.

Despite the increase, the 3-way merger remains accretive to earnings, free cash flow and net asset value. The mergers increase Newmont’s cash to US$850 million and reduce its net debt-to-market capitalization to 23%, largely reflecting the consolidation of Franco’s balance sheet.

Newmont now places a value of A$1.90 on each Normandy share, or 15% more than AngloGold. The premium includes the script components of each bid and is based on each company’s closing price on Dec. 7, the trading day preceeding the release of Newmont’s revised offer.

Both Newmont and AngloGold plan to use existing facilities to cover the cash components and to make deliveries within five business days. Newmont has US$600 million in unused revolving credit.

Normandy’s board of directors and Franco-Nevada Mining (FN-T), which has pledged its 19.9% stake in Normandy to Newmont, remain on board. Once Newmont acquires 50.1% of Normandy’s equity (the minimum acceptance level for the merger to proceed), it begins to merge with Franco at a ratio of 0.8-to-1.

Newmont also stands to succeed AngloGold as the world’s largest gold producer, with annual production of some 8.2 million oz. The company once again points out that 70% of its production and 60% of its reserves would be situated in countries rated AAA by Standard and Poor’s Information Services Group, whereas more than half of AngloGold’s production and reserves are based in South Africa.

Cash costs would average US$175 per oz., meaning the new company’s costs would be third-lowest among its peers. The lowest-cost producers are Placer Dome (PDG-T) and the company to be created through a proposed merger of Barrick Gold (ABX-T) and Homestake Mining (HM-T).

Hedging continues to underscore the battle: Newmont promises to unwind its own and Normandy’s hedge book, whereas AngloGold intends to maintain a policy of hedging up to half of the next five years’ worth of production spread over 10 years. As well, Murdy notes that AngloGold gains only US$36 million in pretax cash flow for every US$25 increase in the price of gold, versus US$162 million for Newmont.

As for negative price exposure, Franco President Pierre Lassonde suggests such talk is mostly rhetoric: “The combination of the three companies, including the Franco-Nevada royalty, will create the cushion against low gold prices. The balance sheet will also help tremendously in that regard.”

Lassonde stresses the benefits of the 3-way merger and the fact that it would result in the industry’s largest landholder. Post-merger, Newmont has 240,000 sq. km of land in which to create new royalty streams and thus reduce even further the possibilty of negative price exposure.

So far, AngloGold has responded by recasting the Newmont/Normandy merger as “complex, highly conditional and a high-risk proposition for Normandy shareholders.” Since then, AngloGold suffered a setback when the Australian Takeovers Panel rejected its objection to Normandy’s official endorsement of the Newmont bid.

AngloGold continues to review the legality of the Franco angle in other jurisdictions, including Canada. Legal proceedings may follow.