Vancouver — Falling metal prices over the past few years may have initiated consolidation in the mining industry, but as the price of bullion rises to levels not seen since 1999, the wave of mergers in the gold mining sector is starting to look more like a tsunami. The latest deal-in-progress has
Canada’s second-largest gold miner is offering 17.5 of its shares for every 100 AurionGold shares, marking a 30% premium over the A$2.51-per-share price at which the company was trading before the deal was announced.
“This is not only a logical move that will create more opportunity and greater long-term value, it is another step in the consolidation of the global gold industry,” says Jay Taylor, Placer Dome’s chief executive officer.
The takeover would give Placer full ownership of the rich Granny Smith gold mine in the Kalgoorlie district of Western Australia and increase its stake in the Porgera mine in Papua New Guinea to 75% from its current 50%. As a result, Placer would move into the number-five slot of global gold producers, with annual production of 3.8 million oz.
“We believe the enlarged Placer Dome will realize significant synergies in the areas of operation, administration, exploration and financing and will benefit from consolidation of our existing interests in the Granny Smith and Porgera mining projects,” states Taylor.
The proposed merger is expected to result in savings of US$25 million per year and push the cash costs to produce an ounce of gold down to an enviable US$175. Placer also sees the opportunity to receive a tax deduction on the purchase price under a revamp of Australia’s tax regime, currently in draft legislation. The new regulations would allow the major to deduct the entire purchase price for tax purposes.
“The value driver is the reserves and resources in the Kalgoorlie district,” adds Tyalor. “There is a lot more gold to be rung out of that area.”
AurionGold has appointed Credit Suisse First Boston to evaluate the offer and told its shareholders to take no action at this stage.
“The board of AurionGold is carefully examining the details of the proposed offer and will provide its advice to AurionGold shareholders as soon as appropriate,” AurionGold says in a statement.
Placer, for its part, has taken steps to clinch the deal by securing the endorsement of South African-based
If the bid is successful, Placer intends to reduce the gold hedge book of AurionGold.
“The company is hedged far more than we would like,” says Taylor. “Our intention is to reduce the size of the book to bring it more in conformity with Placer’s policy, which is to have a modest amount of hedging.”
With bullion trading at its highest level in more than two years, AurionGold had already planned to reduce its forward sales exposure to 60%, from its recent 86% of total reserves, over the next two years. The company reduced its hedge book to 5.2 million oz. at the end of March. The mark-to-market value of AurionGold’s hedge book stands at negative US$224 million. Gold hedging is the practice of selling unmined bullion at fixed prices; such a move is advantageous for a company if gold prices fall at some point in the forseeable future but harmful if the price rises.
Placer has also been busy cutting its existing hedge book, aiming to hold contracts for about 8 million oz. by year-end.
“We’re pretty happy with the gold price,” adds Taylor. “We are bringing our own book down, which at last quarter was about 8.6 million oz. and our desire is to see less than 20% of our minerals reserves committed.”
AurionGold was formed late last year through the US$425-million merger of two medium-sized Australian miners, Goldfields and Delta Gold. The merger catapulted the new company to the million-ounce-per-year level. Under the deal, Delta shareholders received 187 Goldfields shares for every 200 Delta shares.
Delta Gold brought to the table 100% of the Kanowna Belle, Golden Feather and Wirralie gold mines, as well as a 40% stake in the Granny Smith mine. Goldfields added the Paddington and Kundana mines in Western Australia, the Henty mine in Tasmania, and a 25% interest in the Porgera mine in Papua New Guinea.
At the time of the merger, the two companies combined accounted for almost 10% of the Aussie gold index, not far behind Newcrest Mining, which accounted for 12.4% and third-ranked Lihir Gold, which represented 12%. The market leader, Normandy Mining, Australia’s biggest gold producer, laid claim to about 30% of the index. Earlier this year, Normandy was bought out by
Resources to reserves
AurionGold’s operations hold proven and probable reserves of 6.1 million oz. of gold, making the deal seem expensive on the basis of acquistion costs per ounce of gold, but Placer sees signifcant upside in coverting resources into reserves.
Says Taylor: “For recoverable ounces, a good yardstick is one million ounces per year for the next 10 years, and with an aggressive exploration program, this will increase.”
AurionGold also holds a 21% stake in a Zimbabwean platinum mine. Placer though, is firmly focused on the gold assets and considers the platinum mine “peripheral.”
The Australian miner reported a net profit of A$20 million for the latest quarter ended March 31. Gold production during period totalled 238,711 oz. mined at an average total cost of A$419 per oz.
The rising price of gold has Placer more optimistic about its global exploration projects. The major’s properties now host mineral resources of 42.6 million oz. gold in the measured and indicated category, with an additional 13 million oz. deemed inferred. In addition to the 44.5 million oz. of proven and probable reserves, Placer’s operations contain 40.6 million oz. of measured and indicated resources and 7.6 million oz. in the inferred category.
“Many of our properties are becoming increasingly attractive in today’s rising gold price environment,” says Taylor.
At the South Deep project in South Africa, the newly constructed mill is expected to begin pouring gold by mid-June. The major has set its sights on ramping up yearly production to 700,000 oz. by 2007 from 400,000 oz. in 2002. This year, the cash and total costs of producing produce an ounce of yellow metal at the operation are projected to be US$170 and US$208, respectively. After 2007, annual production is anticipated to climb to 750,000 oz.
“The mine sits on one of the world’s most robust orebodies,” says Taylor, “and we expect South Deep will be a key contributor to our growth.”
For 2002, Placer expectes to produce 2.5 million oz. gold and 420 million lbs. copper.
Merger mania
Consolidation in the gold mining sector got off to a late start, compared with base metal companies.
In 2000, a flurry of blockbuster deals saw Billiton beat out
Last year witnessed the largest merger in mining history, as Australian metal and petroleum giant BHP and Britain’s Billiton completed their US$33-billion combination. The new entity,
Following the lead of the base metal miners were the diamond producers. BHP Billiton led the pack by tabling an all-cash $687-million takeover offer for Canada’s Dia Met Minerals. The m
ove boosted the major’s interest in the producing Ekati diamond mine in the Northwest Territories. Then a consortium comprising
Consolidation
In April 2001, the gold mining industry jumped on the merger train, when Franco-Nevada Mining acquired a 19.9% interest in Normandy Mining, in return for US$48 million in cash, the Ken Snyder gold mine and Midas property in Nevada, and some Australian assets.
Then, a few weeks later, Canada’s largest gold miner,
In early September, AngloGold launched a hostile, all-cash bid for Normandy. Two months later, however, Newmont countered with a friendly all-share offer for both Franco-Nevada and Normandy. By February of this year, Newmont had won the battle with an offer valued at US$5.1 billion, creating the world’s largest gold company. In March,
“I think consolidation will continue,” Barrick Gold President Randall Oliphant said at a recent mining conference. “Companies can’t just be regional players, because this is really becoming a global industry.”
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