Plan B: Northgate pitches for Aussie miner

Vancouver — After a recent blow against its Kemess North copper-gold project in B.C., Northgate Minerals (NGX-T, NXG-X) has set its sights on buying Australian gold producer Perseverance Corp. (PSV-A) in a friendly deal valued at roughly US$257 million.

The all-cash offer is aimed at Perseverance’s Fosterville and Stawell gold mines in Victoria state — which will propel Northgate to mid-tier status. The deal also takes some of the sting out of an environmental review board’s recommendation in September against development of Kemess North.

Northgate is offering A20 for each Perseverance share, a premium of about 38% to its Oct. 26 closing price. Northgate will also buy out all of the company’s July 2007 warrants at A8 apiece and assume its A$33.5 million in debt.

“This is an opportunity we have been examining for a long time — since early this year,” said Northgate Minerals president and CEO Ken Stowe in a conference call.

Perseverance’s two mines produced a combined 189,000 oz. gold in the latest fiscal year.

Fosterville churned out 76,706 oz. gold for the year ended June 30, 2007, off slightly from projections due to an increased amount of lower-grade open-pit ore. Ore production has come from a series of open pits with recent underground development contributing the first ore from stoping in January — ramping up to form the bulk of mill feed by mid-year.

Perseverance only acquired the Stawell mine in late 2006, through a stock-based takeover of fellow Aussie miner Leviathan Resources. That operation produced 112,486 oz. gold in its latest year from both open-pit and underground mining.

The mine life at Fosterville is projected at seven years, while Stawell’s is three years. Stawell, however, has operated for about 25 years with just a few years of reserves in front of it.

With the purchase, Northgate meets its goal of securing producing assets in a politically stable region. Additionally, with about 7,700 sq. km of landholdings in the Victorian gold belt, Northgate is optimistic about exploration potential.

In the conference call, Stowe hinted the takeover may lead to more acquisitions in Australia in the future.

Assuming the takeover goes through, Northgate projects 2008 production at 434,000 oz. gold and 71 million lbs. copper (32,200 tonnes). Pro forma average 2008 cash production costs of US$184 per oz. are estimated net of Kemess copper credits and based on a US$2.95-per-lb. copper price.

Stowe said there would be a 99% increase in reported gold reserves to 2.2 million oz. from year-end 2006 and a 93% increase in total resources to 4.24 million oz.

Boards of both companies have unanimously approved the deal.

Northgate is also extending further bridge loan facilities of up to A$25 million for capital development needs and plans to close out Perseverance’s gold hedge book, which accounts for A$48 million in exposure.

“The transaction will leave Northgate on a strong financial footing,” Stowe said. “We are paying for it out of cash on hand, which is good for our shareholders as we will not be diluting their holdings.” He added the company would still have about US$105 million in cash after the deal is closed.

The Perseverance mines offer Northgate stable cash flow and production continuity as the Kemess South gold-copper mine in B.C. winds down and the Young Davidson gold project, in northeastern Ontario, moves towards production by 2011.

“We are doubling our resource base — moving significantly up our peer curve — positioning the company for the next stage in our development,” Stowe said.

The deal is expected to close in February, following Australian regulatory approvals and support of a majority of Perseverance shareholders.

Northgate got a thumbs-up from the market on the news, posting a 10% gain to close up 26 at $2.97 per share.