Gwalia is offering five of its own shares for every 28 PacMin shares. The offer valued PacMin at A$1.20 per share, representing a 29% premium to the PacMin closing share price on Aug. 22, the day prior to the announcement of the bid. There are 132 million PacMin shares outstanding. Gwalia will also pay up to A$6.10 cash for PacMin’s 7.7-million redeemable convertible preference shares, all of which are held by Teck. The total value of the paper and cash bid is A$206 million.
While Teck management has not endorsed the offer, neither have they dismissed it. Teck is reviewing the terms of the bid and says it will indicate its intention in due course.
“It is hard to conceive that SWG would proceed with the bid for PacMin without at least getting some kind of understanding from Teck on whether or not it will tender its shares,” states Canaccord analyst Greg Barnes in a market commentary.
Teck did state that it has a positive view of Gwalia’s gold and tantalum businesses, and recognizes the synergies expected to result from a combination of the two companies’ gold operations. If Teck accepts the offer, it would end up with roughly a 12% stake in Gwalia.
Teck produces gold from four mines: the Williams and David Bell operations, near Hemlo, Ont., and PacMin’s Tarmoola and Carosue Dam mines in Western Australia. Total production in 2000 was 506,000 oz. — less than forecast, owing to heavy unseasonable rains in Western Australia and the treatment of lower-grade stockpiles at Tarmoola during an accelerated waste-stripping phase.
The four mines generated a net operating profit of $52 million in 2000, compared with $60 million a year earlier. The Tarmoola and Carosue Dam open-pit mines are expected to account for nearly half of Teck’s forecast production of 650,000 oz. in 2001. For the first six months of this year, Tarmoola, near Leonora, produced 87,768 oz., whereas the newly commissioned Carosue Dam mine, 110 km northeast of Kalgoorlie, produced 56,216 oz.
Lower gold prices and higher operating costs at the David Bell and Tarmoola mines had a negative effect on the gold group’s 2001 half-year operating profit, which slipped to $16 million from $31 million a year ago.
“The company has stated, over the past 12 months, that it would not be spinning [off] or selling its gold assets, although the market has long believed that the assets are for sale,” states Barnes. “If Teck accepts the SWG bid, it would represent a change in direction. It is also likely that if the PacMin assets are sold, Teck could sell its remaining gold assets. [Such a sale] would solidify the company’s transition into a base metal mining company, after its recent merger with Cominco.”
Sons of Gwalia is a gold and tantalum producer based in Perth. For the year-ended June 30, 2001, the company posted a net profit of A$63.7 million, up 9% over the previous year. Revenue rose 16.6% to A$428.9 million. The company’s advanced minerals division produced and sold a record 1.6 million lbs. of tantalum concentrate (Ta2O5) from its Western Australia operations at Greenbushes and Wodgina.
The advanced minerals division contributed A$61.3 million in earnings, up 79% over last year.
Gwalia has embarked on a A$100-million expansion program at its tantalum operations to increase production to more than 3 million lbs. per year in 2003-2004. Late last year, the company completed a US$120-million (A$220-million) private placement of 10-year senior unsecured notes to selected pension funds in the U.S. Following the repayment of A$150-million in short-term bank debt, A$70 million is earmarked for working capital purposes.
Despite an easing of prices and demand in the spot market for tantalum, the company remains optimistic that the growth in demand for the industrial mineral will be about 6-8% per year. This follows a growth of more than 20% in each of the past two years. Tantalum is used extensively in the electronics and telecommunications industries, as well as in alloys, mill products and specialty chemicals.
The company holds more than half of all defined global resources for tantalum, and currently supplies in excess of 25% of market demand.
Gwalia has fixed contracts with Cabot Corp. in the U.S. and HC Starck, a division of the Bayer Group, in Germany. Together, the two companies represent 85% of the global tantalum processing capacity. The contracts, which serve to cushion Gwalia against any downturns in the tantalum market, are in their 11th year and extend until December 2005.
Gold is the other core business unit of the company. Gwalia produced 438,166 oz. for the year from two regional centres in the NorthEastern Goldfields and Southern Cross regions of Western Australia. Earnings from the gold division were up 3.6% from a year ago, at A$63.6 million.
The proposed PacMin acquisition would “enhance the size and profitability of Gwalia’s gold division and is consistent with the continuing rationalization of the Australian gold mining industry into larger and more efficient gold production centres,” states Gwalia Executive Chairman Peter Lalor. “PacMin’s production and tenement holdings are close to our own and offer a unique opportunity to consolidate the two groups. This, in turn, will result in excellent financial and operational synergies.”
The slide in the Australian dollar has caught a number of Aussie producers on the wrong side of the currency hedge book. Zinc producer Pasminco is reeling from a reported A$850-million out-of-the-money currency position.
Sons of Gwalia saw its share price erode from a record high of A$9.95 in May to a recent low of A$6.40 on widespread media reports the company’s foreign exchange hedge book had suffered losses of more than A$600 million.
Lalor sought to reassure shareholders in mid-August that Gwalia has no outstanding contractual issues with any of its counter-party banks; “and none of its hedging facilities, neither foreign exchange nor gold, are subject to margin call provisions.”
From now until December 2002, the company expects to deliver US$200 million in revenue into its foreign exchange contracts, satisfying contractual commitments. Beyond 2002, it expects to deliver a minimum of US$175 million per year into foreign exchange contracts.
There is speculation that PacMin’s currency hedge book is also under water. Concerns are growing that others may have been caught hedging the Australian dollar in the wrong direction.
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