There is a new gold rush among Canadian miners. Toronto’s AuRico Gold (formerly Gammon Gold) and Northgate Minerals, also of Toronto, have entered into a definitive agreement to create a new intermediate gold producer.
The agreement calls for AuRico to acquire all of Northgate’s shares on the basis of 0.365 AuRico common shares per Northgate common share. Based on the 20-day trading averages of both companies ending on Aug. 26, 2011, the exchange ratio represents a 45% premium to Northgate shareholders.
Both companies are gold producers – AuRico with three mines in Mexico and Northgate with two in Australia. Plus, Northgate is readying the Young-Davidson mine near Timmins, ON, for production next year and the Kemess underground copper-gold mine a few years down the road. AuRico also has a half-dozen exploration projects in Mexico.
Needless to say, AuRico is singing the praises of the proposed business combination. The combined company will produce 730,000 oz of gold by 2013, 500,000 oz of which will come from the Young-Davidson an Ocampo mines. Production will be entirely un-hedged, management is experienced, and the balance sheet is strong. The new entity will be owned 62% by AuRico shareholders and 28% by Northgate shareholders.
High gold prices have heightened interest in gold deals. In July Primero Mining of Vancouver and Northgate announced their intention to combine their assets and create a new gold miner. That deal would have seen Northgate acquire all of Primero’s shares, resulting in a new company with market capitalization of approximately $1.2 billion.
Now Northgate will have to pay a break fee of $25 million to Primero in order to move forward with the AuRico deal. For its part, Primero has agreed to waive its right to match the AuRico proposal.
Neither the Northgate-Primero or AuRico-Northgate deals was hostile. When that is the case, the object of desire scrambles to find an alternative to the takeover. Commonly, larger companies attempt to take over smaller ones. The unusual part of the AuRico-Northgate deal is that Northgate was already in a friendly arrangement with Primero.
CMJ and our readers are familiar with hostile takeovers, and those where large companies want to swallow smaller companies. What is different here is that Northgate got tangled up in two friendly deals, and to break the agreement with Primero is expensive. This writer is inclined to think that the deal with AuRico had better be close to perfect or Northgate has just made a costly mistake.