03 November 2005 Gold Sector: Consolidation Wave Begins?
On Monday, Barrick Gold, Canda’s largest gold miner, launched an unsolicited takeover bid for Placer Dome worth US$9.2bn, to create the world’s largest gold company. Macquarie Research Equities (MRE) believe the bid will have flow-on effects for Australian gold producers due to the limited pipeline of organic growth opportunities available for the large gold companies, bringing take-overs onto the agenda. While it is often dangerous to speculate on potential corporate activity, the gold sector has a history of undergoing major consolidation phases, the last one being in 1999–2002. In the face of rising gold prices, limited growth opportunities and increasing capital and operating costs, acquisitions are starting to look attractive again.
Bid structure Under the terms of the offer, Placer Dome’s shareholders can receive either US$20.50 in cash or 0.7518 Barrick Gold shares and US$0.05 for each Placer Dome share. In a side deal, Goldcorp will acquire certain assets from Barrick Gold for US$1.35bn. The offer values Placer Dome at US$20.50 per share or US$9.2bn, which is a 24% premium to the closing price of Placer Dome prior to the bid. Other potential bidders? The is some speculation that Barrick could afford to pay up to 15% more for Placer Dome, which also suggests that the offer is priced with an expectation of a counter bid. A joint bid by Newmont and Goldfields has merit, given the synergies in the US, Canada, Australia and South Africa. Newmont has historically been a spoiler in larger gold transactions, including Anglogold’s bid for Normandy in 2001. Implications for Australian producers MRE believe that Newmont and Anglogold remain interested in major acquisitions, as the pipeline of organic growth opportunities is limited. Australia is especially attractive given its lower political risk and relative valuation differentials. Also, if there is a counter bid for Placer Dome, the implications are two-fold: i) a higher offer price would further drive up valuation metrics and increase the differential between the US and Australian producers; and ii) one consortium would lose out, which often leads to further industry consolidation. Finally, MRE believe that most of the major gold companies are now prepared to accept a considerable amount of non-gold (base metals) production in the suite of assets acquired, with positive implications for Newcrest and Oxiana.
MRE retain outperform recommendations on Newcrest Mining (NCM) with a price target of $22.50 and Oxiana (OXR) with a price target $1.45. MRE have a neutral recommendation on Lihir Gold (LHG), with a price target $2.00.
OXR Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
