New Gold sees opportunity in $310M Rainy River deal

VANCOUVER — With junior equity valuations falling, it’s a good time for larger-cap companies to do a little bargain hunting. And that’s the case for producer New Gold (NGD-T, NGD-X), which has launched a friendly $310-million takeover of gold explorer Rainy River Resources (RR-T).

New Gold is offering $3.83 per Rainy River share, paying up to $198-million in cash with the rest in stock to a maximum of 25 million New Gold shares. The offer is a 42% premium to Rainy River’s recent share price and a 67% premium to its 20-day volume-weighted average price.

Rainy River’s namesake gold-silver project lies 65 km west of Fort Frances in the southwest corner of northwestern Ontario,.

It hosts 116 million proven and probable tonnes grading 1.08 grams gold per tonne and 2.76 grams silver per tonne for 4 million oz. in-situ gold and 10.3 million oz. in-situ silver. Perhaps more attractively, Rainy River’s open-pit resource totals 113 million tonnes grading 0.97 gram gold and 2.65 gram silver for 3.5 million contained oz. gold and 9.7 million contained oz. silver.

Rainy River has identified two stages of gold mineralization at the project to date, with the early stage associated with sulphide stringers and veins and disseminated pyrite in quartz-phyric volcaniclastic rocks and conglomerate, while late-stage mineralization is associated with quartz-pyrite-chalcopyrite-gold veins and veinlets.

New Gold’s timing on the acquisition comes barely a month after Rainy River released a feasibility study. It outlines a 16-year open-pit mine that would carry a $731-million price tag and produce 326,000 oz. gold and 494,000 oz. silver annually over its first 10 years at average cash costs of US$468 per oz. gold — including royalties and net of silver credits. All-in costs are estimated at US$771 per oz.

At a US$1,400 per oz. gold price and US$25 per oz. silver price Rainy River would carry a $931-million after-tax net present value and 23.7% internal rate of return.

“The Rainy River project is an asset we’ve been following for some time and understand very well,” says New Gold executive chairman Randall Oliphant. “One of the things we really like about Rainy River is the location. Importantly we have been able to achieve our growth in reserves and resources while further building upon our portfolio in Canada. At a time when less-established mining jurisdictions have proven increasingly challenging, we feel very well-positioned.”

Following the acquisition, New Gold’s gold reserves would jump by 44% per share, while measured and indicated resources would increase by about 20% per share. 

The company continues to target large-scale gold assets in Canada, with 62% of its pro forma measured and indicated gold resources lying within the country’s borders.

Rainy River marks the second major Canadian acquisition for New Gold over the past two years. The company acquired the Blackwater gold project — located 160 km southwest of Prince George, B.C. — in June 2011 through a friendly $550-million, all-share takeover of Richfield Ventures at $10.38 per share.

“I think we have the capacity to build both projects simultaneously. We already have the Blackwater team in place so there is no impact there, and we see greater availability now than we have in the last five years in terms of mining talent because so many projects have been deferred,” Oliphant says.

“Projects were valued a lot higher two years ago than they are today despite the fact that they are lower risk. From our perspective we view these assets as having lower acquisition costs and lower risks. They are more advanced than they have been in years, plus there is a lot of talent available to build these mines,” he adds.

Oliphant says that New Gold maintains some flexibility on both projects, and will likely make sequencing and capital decisions within 18 months based on gold prices and market activity. 

Blackwater’s feasibility study is due in the coming weeks, while Rainy River is in the permitting stages and had been scheduled to hit production by early 2016. 

According to a September 2012 preliminary economic assessment, Blackwater would carry a US$1.8-billion development cost.

And the offer price is definitely opportunistic for New Gold, with Rainy River’s shares well off a 52-week high of $6.17, and recently having fallen to a rock-bottom low of $2.04 per share in late April. 

Since the onset of 2013, and prior to New Gold’s bid, Rainy River had lost 47% of its market capitalization and seen its equity valuation drop by $2.37 per share. Following the news of the bid on May 31, Rainy River’s shares jumped 36%, or 96¢, to better reflect the acquisition premium at $3.66 per share.

Markets were less kind to New Gold, as the company’s shares dropped 8.6% — or 66¢ following the news — before closing at $7 per share. New Gold had 477 million shares outstanding at press time for a $3.4-billion press-time market capitalization. The company reported cash and equivalents of US$672 million at the end of March, and generated net earnings of US$36 million, or 8¢ per share during the first quarter.

“I think we have lots of access to capital. The bond market appears wide open for gold mining companies, given our successful offerings last year, and offerings by other companies,” Oliphant says, citing Barrick Gold’s (ABX-T, ABX-N) US$3-billion debt security sale in early May.

“We’re approached regularly by banks about expanding the size of our revolver and things. These projects generate good returns and are in decent jurisdictions, so there are plenty of people interested in financing them if we can’t do those ourselves internally,” he concludes.