By Kishori Krishnan
That’s below Thursday’s closing price of C$12.30 on the Toronto Stock Exchange, but about $1.30 above Eldorado’s stock price in June, when Gold Fields acquired the shares. Eldorado shares dipped 18 cents or 1.5 per cent in early trading Friday.
The Gold Fields stake represented about seven per cent of Eldorado’s outstanding shares. It had received the shares when Eldorado bought its 19.9 per cent stake in Sino Gold Mining Ltd in June.
Gold Fields said it retains a top-up right negotiated with Eldorado. The right allows Gold Fields to receive an additonal payment if Eldorado pays a higher price to another seller for an additional five per cent or larger stake in Sino Gold.
Sell some, buy some
Eldorado announced last month that it would acquire the rest of Sino Gold through a stock swap valued at about C$2 billion when it was announced August 26. In the world’s biggest gold-producing country, one Canadian miner now reigns supreme. Eldorado Gold Corp’s all-stock deal to buy Sino Gold Mining Ltd, which values Sino at about $2-billion, creates the dominant foreign gold producer in China and positions the company for more Chinese growth.
It is the culmination of a long-term strategy for Eldorado chief executive Paul Wright, who first moved into China in 2004 because he saw that it was vastly unexplored and was on the cusp of becoming a critical location in the global gold industry.
Today, China produces nearly 300 tonnes of gold. It is also the only country in the top three where production rose in 2008. Despite those statistics, China has proven to be a tough nut to crack for foreign gold companies. None of the majors have any serious presence there, and there have been some high-profile failures. Eldorado though has made it work.
Under the terms of that deal, shareholders of Australia-based Sino Gold will receive 0.55 of an Eldorado share for each share they own. Based on Thursday’s closing price, that’s worth C$6.77. A merger of the two companies will create a multinational gold produer with a combined stock value of about $6.4 billion. The combined company would maintain headquarters in Vancouver with a major office based in Sydney.
The deal, which is still subject to regulatory and court approval, is slated to close in December. Gold Fields said Friday it will use proceeds of from the sale of its Eldorado shares for debt repayments.
Canadian miner Silvercorp Metals Inc has also has been producing precious metal mines in China.
Mining takeovers surge
Global mining mergers and acquisitions, down more than 50 per cent this year, are set to recover in the first quarter as metal prices surge on signs the worst recession since World War II is easing. “You are going to get a greater number of deals being done with the existing majors and also with the mid-tier companies becoming majors themselves,” said Eric Lilford, head of Australia mining at Deloitte Corporate Finance in Perth. “By the end of first quarter of 2010, we will be looking at a stronger position overall for mergers and acquisitions.”
Foot in the door
Some players in the mining industry however, prefer a foot in the door strategy, according to analysts. Eldorado Gold Corp’s takeover of Sino Gold Inc should hardly have come as a surprise. Getting a foot in the door has long been a strategy to open new opportunities, says Wendell Zerb, Canaccord Adams analyst.
And while M&A activity remains strong in the mining sector, companies, looking for exposure to assets of interest, continue to take a more passive initial equity interest in other companies.
“It’s not a new strategy,” he said in a note to clients. “Companies interested in a particular mining project take an equity position in a company of interest in order to have an advantage over other suitors, should the asset meet its criteria for acquisition.”
At last count, larger companies have taken equity positions in no less than 37 junior miners listed on the TSX and the TSX venture exchange, he said.
More often than not, these minority stakes remain passive investments but should a competing takeover bid surface, a minority equity position could help ward off the rival suitor.
“Having a share position accumulated at lower prices than a competing takeover bid allows for the company to top the bid while still maintaining an overall, competitive average cost,” the analyst said.
While predicting the next big acquisition from the long list of junior companies with big name minority shareholders is difficult at best, Zerb thinks Goldcorp Inc’s recent equity investment in Osisko Mining, a junior miner controlled largely by Agnico-Eagle Mines Inc, has takeover battle written all over it.
Incidentally, Agnico-Eagle made a similar equity investment to Goldcorp in Gold Eagle Mines in June 2008, bringing their total stake to 7.16. Gold Eagle was then subject to an eventually successful takeover bid by Goldcorp. There is a possibility that this could end in a similar manner with roles reversed this time, and Agnico-Eagle potentially coming back with a bid for Osisko, aver some traders.
There is a growing deal pipeline.
In July, African miners Randgold Resources Ltd and AngloGold Ashanti Ltd teamed up and bid for Moto Goldmines Ltd, valuing the huge gold deposit in the Democratic Republic of Congo at about $488 million. That trumped a $435 million bid from Canada’s Red Back Mining Inc, another Africa-focused mining company;
Also in July, Gold Fields Ltd agreed to buy Glencar Mining plc for about Â£28 million ($47 million);
On August 6, Vancouver, British Columbia-based metals mining company Teck Resources Ltd said it will sell its majority interest in the Morelos gold project in Mexico for just over $150 million to Gleichen Resources Ltd of Vancouver; and
Chinese shares rose on Monday to extend gains on hopes that Beijing will continue to use policy to support asset prices, while gold prices dipped but kept within striking distance of $1,000 after US unemployment rose to a 26-year high.
Among the factors cited by analysts for a broad rise in Asian equity prices were a pledge by G20 leaders over the weekend to keep stimulus measures in place for longer and draft rules from China allowing more foreign portfolio investment.
However, the relationship between assets based on risk taking by investors has loosened up some, a sign perhaps of underlying uncertainty about the medium-term outlook, crowded trades and stretched valuations.
“Fears about a ‘jobless recovery’ have increased as a lack of hiring is set to persist for some time year,” said Mitul Kotecha, head of foreign exchange strategy with Calyon in Hong Kong.
“It is good news that officials are committed to maintaining stimulus but this commitment cannot be indefinite.”
Gold fell in Singapore on Monday, snapping a four-day advance, as some investors sold holdings after bullion surged close to the highest this year. Bullion jumped 4.1 per cent last week, the steepest weekly gain since April, as the Dollar Index declined, reversing a 0.4 per cent advance the previous week.
“There is growing interest in profit-taking after gold neared the $1,000 level,” said Jang Joong Shik, head of precious metals trading with Hyundai Futures Company in Seoul. “The dollar will keep a weak tone which, combined with inflationary concerns, will power a further rise in the metal.”
Gold for immediate delivery fell 0.2 per cent to $992.55 an ounce in Singapore. The metal has advanced 13 per cent this year. Hedge-fund managers and other large speculators increased their net-long position in New York gold futures in the week ended September 1.
Speculative long positions, or bets prices will rise, outnumbered short positions by 184,501 contracts on the Comex division of the New York Mercantile Exchange.
Roo may rule
Australia is set to pass the US and become the second biggest gold producer. The country is set to surpass the US in gold production this year as new mines boost output to meet demand that’s driven the metal 13 per cent higher, a research group said.
Output rose 4 per cent to 57 metric tons in the June quarter as producers including Newmont Mining Corporation and Newcrest Mining Ltd expanded operations, Melbourne-based Surbiton Associates Pty said.
Investors bought 46 per cent more gold in the second quarter than a year earlier, the World Gold Council said last month. Standard Chartered Plc last week forecast it may average $1,100 an ounce next year.
“The ramp up of some new operations contributed to an increase in the amount of ore treated in the June quarter,” said Sandra Close, a director of Surbiton Associates, which collates results from Australia’s gold-mining companies to produce its numbers.
Output may increase in the current quarter as Newmont’s Boddington mine makes its first contribution, Close said, and Australia may this year become second only to China in gold production.
The Super Pit, a venture involving Newmont and the world’s largest gold producer, Barrick Gold Corporation, was Australia’s largest producing mine in the quarter with output of 198,000 ounces, the report said. Newcrest’s Telfer mine ranked second at 164,871 ounces.
Soon, Australia’s gold industry is set to climb up the ranks of global producers. The local $8 billion industry now ranks equal third with the former heavyweight of the global industry, South Africa, behind the US in second spot and the world’s biggest gold producer, China.
Several other new or redeveloped gold operations in Western Australia are set to join the list of producers in the current financial year. They include A1 Minerals’ Brightstar project and Range River’s Mount Morgans project, both of which are expected to start production in December.
The end of the year will also see Focus Minerals’ recommission its Three Mile Hill treatment plant. Saracen is due to restart the Carosue Dam project in March 2010. It will be followed by Catalpa’s Edna May operation and Integra’s Randalls project.