Analyst gives nod to Battle Mountain-Newmont merger Investment Commentary

What’s good for the goose isn’t alway great for the gander. Tanya Jakusconek, gold analyst for National Bank Financial, views the recently announced merger between Battle Mountain Gold (BNG-N) and Newmont Mining (NEM-Y) as somewhat better for the former than for the latter.

In a research report, Jakusconek describes the merger as “an excellent deal” for Battle Mountain Gold shareholders. “BMG had no definitive growth strategy, which, coupled with a weak balance sheet and the requirement for capital to develop Phoneix, meant the shares were, at best, a market performer on a stand-alone basis.

“For Newmont shareholders,” she continues, “this transaction is uninspiring. Our cash flow, net asset value and earnings per share show a slightly negative impact from the merger.”

Even so, the firm views Newmont as a “blue-chip U.S. gold play,” with good leverage to the gold price (it is only minimally hedged). Accordingly, the firm has not changed its “buy” recommendation or its target price of US$29 per share.

The boards of both companies agreed to a merger whereby Battle Mountain Gold would become a wholly owned subsidiary of Newmont. The major is offering 0.105 of a share for each BMG share, and would issue 24.2 million shares worth about US$459 million, a 24% premium to the closing price before the announcement.

Newmont would then have 192.2 million shares outstanding, a 15% increase over the present number.

Various approvals and conditions are still required; however, closing is expected to take place in late September or early October. The merged company would have annual production of 5.4 million oz., making it the world’s second-largest producer, with 66.5 million oz. in proven and probable reserves. Cash costs are estimated at US$170 per oz.

BMG’s Phoenix project, in Nevada, was the main driver behind the transaction, Jakusconek notes. It has 5.7 million oz. in reserves, or about 58% of BMG’s reserve base. “Assuming Phoenix heap-leach production comes on-stream in January 2002 and mill production begins a year later, Newmont’s cash costs will drop further to US$165 per oz. in 2003,” she estimates.

Phoenix is expected to produce 390,000 oz. gold annually at cash costs of US$140-150 per oz. Capital costs are estimated at US$200 million.