Barrick, Homestake propose marriage

In a paper deal worth US$2.3 billion, Barrick Gold () has agreed to take over Homestake Mining (HM-N) and thereby become the world’s second-largest gold producer.

Barrick is offering 0.53 of a share for each of Homestake’s 263.3 million shares outstanding. This results in the issuance of 139.5 million new shares, increasing Barrick’s total number outstanding to 535.5 million.

Directors at both companies have given the deal their stamp of approval, and Barrick has lock-up agreements for 12% of Homestake’s equity. Curiously, one of the signatories, Munich shareholder August von Fink, had owned, on March 6, 12.25% himself, while the company’s directors and executives had owned, or had the right to acquire by May 6, a combined 4.02%.

Nevertheless, Homestake’s remaining shareholders, plus regulators on both sides of the border, must favour the deal as well. The transaction does not require the approval of Barrick’s shareholders.

Describing it as a “bittersweet moment” in his company’s storied history, Homestake Chairman Jack Thompson believes the proposed agreement is in the best interest of shareholders. “Overall, this deal gives Homestake many more options and a wider window of opportunity from which to expand. The combined company will have significant financial muscle to undertake any profitable growth, both within and outside of our portfolio, which has been a real challenge for Homestake alone.”

Thompson, who approached Barrick with the idea a few weeks back, also emphasized the offer’s 27% premium on Homestake’s average closing price for the 10 trading days preceeding the announcement. The deal’s tax-free nature was another noted point.

Homestake brings to the table 12 major mines in four countries hosting combined reserves of 20.8 million oz. The mines produced 2.2 million oz. last year at a total cash cost of US$174 per oz.

For Barrick, which produced 3.7 million oz. last year at US$145 per oz., the addition makes it the largest producer in North America and the second-largest in Australia. Moreover, its output brings the major to within just over 1 million oz. of the world’s largest producer, Anglogold (AU-N), while maintaining its position as the lowest-cost producer among its peers.

Of greater importance still is the potential for financial gain: “In terms of financial strength, the merged company is expected to have the highest earnings, cash flow and profit margins in our industry, backed by the only A-rated balance sheet in the business,” says Barrick President Randall Oliphant.

Large market cap

“From the point of view of the capital markets, the merged company will have a market capitalization double the size of its nearest competitor.”

Moody’s maintains its A3-rating on Barrick’s senior unsecured debt and is reviewing Homestake’s ratings for possible upgrading. Barrick began the year with US$623 million in long-term debt and US$623 million in cash, whereas Homestake had US$225 million in debt and US$193 million in cash, for a combined net debt of US$85 million, 20% of total capitalization.

Starting in 2002, Barrick expects the merger to result in US$55 million in annual after-tax savings. The savings are won in areas of taxation, administration and exploration.

Hedging

The deal also leaves Barrick’s hedging position essentially unchanged, as Homestake runs a small book itself. At the end of the day, Barrick winds up with 22% of its resulting 79 million oz. in reserves sold forward at a minimum of US$345 per oz. Just over half of the reserves are contained in North America and Australia; a third are in South America and the remainder are in Tanzania.

Oliphant also noted the possible combination of the Veladero and Pascua-Lama projects in the El Indio belt, which straddles the Chile-Argentina border. This essentially erases Barrick’s failed attempt, just over two years ago, to acquire the 60% of Veladero it did not own through a takeover of Argentina Gold (it owns Pascua-Lama outright). Homestake wound up the winner of the battle by paying US$200 million.

“Putting all of the Pascua-Lama and Veladero reserves under one roof certainly makes these projects less expensive and more efficient to build and operate,” says Oliphant. “At this point, we are stepping back to look at this as a combined project and figure out the best way to develop it, but we expect the overall result will be much better than what we could have done as two separate entities.”

Treated separately, the projected capital expenditures ring in at US$1.7 billion, with Pascua-Lama accounting for US$1.25 billion. Homestake had planned to release an exploration update for Valedero in the coming weeks, but now it may have to change its plans.

At the end of 2000, Pascua-Lama hosted proven and probable reserves containing 17.5 million oz. gold and 594 million oz. silver in 314 million tons. Reserves at Veladero (as defined by Homestake) contain 5.5 million oz. gold and 81.2 million oz. silver in 118.3 million tons.

The deal provides for a break-up fee of US$80 million in the event of a successful counter-bid. Although no extraordinary conditions need be satisfied, the companies must be able to pool their interests under U.S. Generally Accepted Accounting Principles in order for the takeover to proceed.

Barrick plans to maintain its dividend policy and keep its head office in Toronto. Barrick has hired RBC Dominion Securities and CFFC as its financial advisors, whereas UBS Warburg Dillon Reed is advising Homestake.