Newmont plans three-way deal to become the biggest

Throwing a curveball at the consolidating gold sector, Newmont Mining (NEM-N) intends to acquire Normandy Mining (NDY-T) and Franco-Nevada Mining (FN-T) to create the world’s largest gold miner.

“This is nothing less than the revitalization of the gold industry,” boasts Newmont chairman Ronald Cambre. “This three-way [merger] creates a company with a superior and balanced asset base; stable, new income streams; and the financial strength to do whatever is needed to deliver on building the wealth of its shareholders as the world’s best gold company.”

Post-merger, Newmont would have a market capitalization of some US$8 billion, rivalling that of the proposed merger of Barrick Gold (ABX-T) and Homestake Mining (HM-N). Net debt-to-capitalization rings in at 18%; combined, Barrick and Homestake would have a ratio of 20%.

However, in terms of production, Newmont would become the world’s largest producer, with annual production of 8.2 million ounces — about a million ounces more than AngloGold (AU-N), currently the world’s largest producer.

The post-merger entity’s cash costs are expected to average roughly US$175 per oz., making it the third lowest cost producer after Placer Dome (PDG-T) and Barrick/Homestake. As for financial benefits, the mergers are expected to be accretive to earnings, cash flow and assets. It will also result in US$70-80 million in annual after-tax savings in the first year alone.

Newmont boasts the largest reserve base, with 97 million ounces spread among 30 mines, and would have the largest property holding.

“This is about portfolio diversification, and we expect that the new Newmont will be the clear choice for investors seeking upside to gold,” says Newmont President Wayne Murdy. “We’ll have huge trading liquidity and substantial cash flow from operations in excess of US$700 million, even at today’s gold price. This combination immediately makes Newmont one of the strongest and best-capitalized companies in the industry.”

Under terms of the deal, Normandy shareholders receive 0.0385 of a Newmont share for every share tendered. They are also entitled to a cash bonus of A5 per share if more than 90% of them tender their shares.

So far, Franco-Nevada has committed all of its 446 million Normandy shares, representing 19.9% of that company’s 2.23 billion shares outstanding. Likewise, Normandy chairman Robert Champion de Crespingy, who holds just under 3%, has offered his shares.

The offer values Normandy at A$3.8 billion (including the cash bonus) and represents a premium of 21% over an earlier bid by AngloGold. For Franco-Nevada, this translates into an extra US$67 million over the carrying value of its holdings –US$247 million; but Franco’s chairman Seymour Schulich empasizes synergistic advantages over one-time gains.

“First and foremost, let me say that all three companies firmly believe in gold,” he says. “This transaction will give the new company significant leverage to the gold price, as well as a very strong balance sheet.”

Both Schulich and President Pierre Lassonde have agreed to hold 70% of their personal holdings of the new Newmont in escrow. The Franco-Newmont deal kicks in once Newmont has acquired 50.1% of Normandy and will follow an exchange ratio of 0.8-to-1, representing a 23% premium over the companies’ average ratio over the past year.

On June 30, Normandy had 6.4 million ounces sold forward at A$585 (US$303) per oz. and another 175,000 ounces at US$494 per oz. through to 2010. It also had put and call options on several million ounces over the same period.

The head office will be located in Denver and employ 12,500 people worldwide. Newmont’s current shareholders would own 50% of the new Newmont; Franco-Nevada shareholders, 32%; and Normandy shareholders, 18%. A listing will be sought on the Australian Stock Exchange, and Newmont will inherit Franco’s Toronto listing.

A break-up fee of US$100 million is payable by Franco-Nevada and A$38.33 million by Normandy. The deal is expected to close by the middle of next year.