Mexico-focused miner AuRico Gold (AUQ.TO: Quote) has offered to buy Northgate Minerals (NGX.TO: Quote) for C$1.46 billion ($1.5 billion) in a friendly deal that would nearly double its output and expand its geographic reach as gold prices soar.
The takeover offer, a 62 percent premium to Northgate's closing share price on Friday, is the latest in a string of deals involving Canadian gold miners as prices for the metal climb faster than many of the most bullish analysts had forecast.
If approved it will see AuRico's gold resource rise from 10.3 million gold equivalent ounces to almost 19 million and add operating mines in Canada and Australia to its portfolio.
Annual production would increase to 470,000 ounces in 2011 from 280,000, and the combined output would be more than 730,000 ounces by 2013.
Shares of AuRico Gold dropped 16.91 percent on Monday in Toronto to C$11.40. One analyst said the drop was likely because AuRico was seen as overpaying for Northgate. Northgate shares jumped 31 percent to C$4.06.
AuRico, whose name is a combination of the letters Au, the atomic symbol for gold, and Rico, the Spanish word for rich, is in a drive to reposition itself and turnaround market perceptions, which it said were pushing its stock price too low.
It changed its name from Gammon Gold in May, a month after buying Capital Gold for C$420 million after a drawn-out battle with smaller rival Timmins Gold (TMM.TO: Quote).
We have a new set of peers in our group and we think there's a huge opportunity for a great re-rating story going forward, Chief Executive Rene Marion told analysts after announcing the deal on Monday.
ALL STOCK DEAL
Dahlman Rose analyst Adam Graf said the deal is a positive step for AuRico as it looks to build itself into a mid-tier gold producer. It would certainly give AuRico significant geographic diversity, he said.
Northgate's flagship asset is the Young-Davidson project, located on the site of two defunct gold mines in northern Ontario. Start-up is expected in early 2012 with planned annual output of 180,000 ounces.
Northgate, which is also a copper producer, also owns the Fosterville and Stawell mines in Australia and the Kemess project in British Columbia.
AuRico owns the Ocampo, El Chanate and El Cubo gold mines in Mexico.
Under the terms of the agreement, Toronto-based AuRico will pay 0.365 of a common share for each Northgate common share. When the deal was announced before the market open, the offer was worth about C$5.01 a share, or C$1.46 billion in total. But that fell to C$1.21 billion as AuRico shares fell to C$4.16 after the open.
It is likely that the market believes that AuRico is overpaying for the Young-Davidson asset, Desjardins Capital Markets analyst Brian Christie wrote in a note to clients, adding that the market has historically given little value to Northgate's other assets.
Northgate has 291.98 million shares outstanding and had a market capitalization of about C$922 million before the AuRico deal was announced, according to Thomson Reuters data.
AuRico has a market capitalization of about C$2.38 billion, with 173.18 million shares outstanding.
The acquisition of Northgate spoiled plans by Northgate to acquire Primero Mining (P.TO: Quote) in July for C$370 million.
Primero will be paid a termination fee of C$25 million by Northgate.
UBS Securities Canada Inc was the financial adviser for AuRico, while GMP Securities L.P. advised Northgate.