Placer cuts hedge book, extends Aurion offer

A day after deciding to reduce its hedge book, Placer Dome (PDG-T) extended its takeover offer for AurionGold, an Australian producer that is itself heavily hedged.

By year-end, Placer expects to have trimmed its hedge book by 20%, leaving it with 6.8 million pages. The reduction will come by way of normal turnover and the elimination of call options that cover 1.1 million oz. and mature in 2003 or 2004.

Placer will enter 2003 with 40% of the next five years’ worth of production hedged, or 15% of its reserves. Next year’s commitments are less onerous, accounting for just 10% of expected production.

Placer has extended its offer for AurionGold to give holdouts more time to reconsider their objection. The major has prolonged the closing date five times since announcing its hostile intentions last May.

“We strongly believe our offer is attractive . . . and that an investment in Placer Dome provides significantly more liquidity globally than AurionGold and greater leverage to an increasing gold price,” states Placer Dome President Jay Taylor.

The major now owns nearly a third of AurionGold, of which 9.8% was obtained as a result of a lock-up agreement with Harmony Gold (HGMCY-Q). Group fund Colonial First State and M&G Investment Management, which own a combined 22%, have voiced their disapproval of the proposed deal.

Placer maintains that the reduction of AurionGold’s free float will cause the company’s weighting in various Australian Stock Exchange indices to shrink in proportion, and that this, in turn, could convince index investors to sell their shares.

The conditions for the offer, which closes Sept. 10, remain set at 17.5 Placer Dome shares and $28 for every 100 AurionGold shares. On Aug. 28, that put Placer’s implied value of AurionGold at A$3.38 per share, or roughly 3% more than the actual closing price.

At the end of June, AurionGold’s hedge book covered 5.95 million oz., or 78% of reserves and had a mark-to-market value of negative A$393 million. The hedge book is dominated by Australian-dollar-denominated purchased put options and sold call options. Aurion is not subject to margin calls from its counterparties..

Placer’s forward-sales program contributed US$54 million to earnings in the first half of 2002. At June 30, the program had a positive mark-to-market value of US$223 million.