Directors of Australian gold miner
To emphasize the point, AurionGold directors who own shares are personally rejecting the current offer and have vowed to refrain from selling shares into the market.
In a deal unveiled May 27, Placer is offering 17.5 of its shares for every 100 AurionGold shares. At the time, the offer valued the Aussie miner’s shares at A$4.51 apiece — a 30% premium — for a total offer of about US$1.1 billion (A$2 billion).
Placer’s rationale for the takeover offer is centred around potential operational savings that could be had at the companies’ gold mines, particularly at the two jointly held ones: Granny Smith in Australia and Porgera in Papua New Guinea.
Still, the thinking behind Placer’s offer has left some people scratching their heads: first, because it is rather unusual and shows a certain lack of finesse to make a hostile bid for your junior joint-venture partner; and second, it seems self-destructive to be paying a premium for one of the world’s most heavily hedged gold miners (5.5 million oz. hedged, or five years of production) at a time when gold prices are mounting a sustained rally and shares of unhedged gold miners are strongly outpacing those of the hedgers.
The market reaction to the deal has been swift and clear: since the offer was made, Placer shares have nosedived 20%, from US$14.27 (C$21.92) on May 24 to US$11.45 (C$17.24) at the close on July 9. In dollar terms, it has wiped about US$218 million off the value of the offer.
Meanwhile, AurionGold shares jumped to A$4.77 on May 29 from A$3.48 on May 24. Since late May, however, they have declined steadily to trade at just A$3.67 on July 9.
At the July 4 close, immediately prior to AurionGold’s official rejection, Placer’s offer valued AurionGold at A$3.42 per share, or below the A$3.48 level at which the shares were trading just before Placer’s offer.
One new wrinkle that has put additional selling pressure on Placer stock was Standard & Poor’s unexpected removal of Placer from the S&P 500 index, along with six other non-U.S. companies. On July 10, the first trading day after the announcement, Placer shares sank about 5% to US$10.80 (C$16.43).
“We’re currently sitting at a share price that isn’t much different from [what it was] prior to the bid, so effectively there’s no premium,” says AurionGold Chief Executive Officer and Managing Director Terry Burgess, speaking to The Northern Miner from Tasmania.
“As with any company, any time someone makes the right takeover offer, then this company will be for sale,” he says. “Currently, with Placer’s offer being a scrip bid and with the value that it has, it’s clearly not enough for directors to recommend that that offer go ahead. Certainly, if Placer revisited the offer and significantly improved it, then we would judge it on its merits.”
Placer could certainly afford to put a cash sweetener on the table: at last report, the major had US$450 million in cash, plus more than US$700 million in undrawn bank credit lines.
However, with gold prices currently retreating below US$320 per oz. and not a single rival bidder coming on to the scene, Placer has decided to play hardball and is extending the offer to July 24 without offering anything new in the way of cash or shares.
In evaluating AurionGold’s value, Placer points to last year’s public evaluation, by Grant Samuel, of Delta’s and Goldfields’ combined assets — an evaluation made at the time the two companies were merging to form AurionGold. This assessment generated a fair-value figure of A$1.95-2.46 per AurionGold share using a gold price of A$559-578 per oz.
Value ratio
However, Burgess says this evaluation was “done some time ago, and it was something that was really carried out primarily to check the value ratio between Delta and Goldfields at the time of the merger.”
Furthermore, he says, the evaluation does not take into account subsequent developments, such as the acquisition of a large land position from Centaur Mining & Exploration in Australia’s Kalgoorlie region.
“The one most-important factor that doesn’t get taken into account in these kinds of calculations is the strategic value of the company, and obviously that’s important to Placer,” says Burgess.
As for the feedback he is receiving from AurionGold shareholders, Burgess says there has been “pretty good support. . . The message that I’ve received from both institutional and retail shareholders is that the offer, as it stands, just doesn’t stack up.”
Burgess acknowledges the risk that, if the company pushes too hard and scares off Placer, AurionGold’s shares could take a hit: “Obviously that’s important to us. One of the things we said when we made the rejection is that we accept that our share price will fall. But then, the last time the gold price was around the US$310-315 level — of course, it’s gone up since then — we were trading at around A$3 to A$3.30, which isn’t a huge amount less than where we are today.”
Surprise bid
Burgess confirms that there had been no discussions with Placer about a possible business combination prior to the launch of the hostile bid. He says he is “surprised there wasn’t a friendly overture. [Placer Dome President] Jay Taylor has said that this is the normal way of doing things in Australia, and I really have to disagree with that . . . especially with a joint-venture partner. Now, of course, if there was a friendly overture and at first it didn’t succeed, then people must do what they need to do.”
Burgess refuses to reveal whether or not AurionGold has been in discussions with any potential third-party bidders, but he does say management “is looking for any way we can add value for our shareholders, whether it be seeking alternative bidders, trying to get Placer to improve its bid, or making sure that we end up with a viable, stand-alone company. We’re trying to do all three things at the same time.”
Placer’s offer is conditional on at least 51% of AurionGold’s shares being tendered. Taking a page from Newmont Mining’s recent takeover of Normandy Mining, which had the blessing of minority Normandy shareholder Franco-Nevada Mining, Placer launched the AurionGold takeover bid with the “pre-acceptance” of South Africa’s
Meanwhile, to stir the pot, Auriongold has released a flurry of results from deep exploration drilling at its Kanowna Belle mine, 18 km northeast of Kalgoorlie, Western Australia.
The drilling produced significant gold-mineralized intercepts east of mining blocks C and D at a depth of 570-760 metres below surface.
AurionGold describes the results as indicating “potential for a new mineralized zone,” which would be easily accesible from the existing mine development.”
Highlights from this new area include: 8 metres grading 4.2 grams gold in hole KDU 1428 near block D, and 11 metres of 6.1 grams gold in hole KDU 1423 near block C.
As well, drilling beneath the mine’s block E indicates a possible high-grade extension at depth toward the east.
The company believes these results will likely result in a further boost in Kanowna Belle’s reserves.
Two weeks earlier, in what was widely seen as a manoeuvre to wrangle a better takeover premium, AurionGold announced a 1.6-million oz., or 25%, increase to 7.7 million oz. in attributable gold reserves.
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