Hemlo Gold’s initial offering largest outside South Africa

Morgan Grenfell Securities of London says it expects Hemlo Gold Mines’ initial public offering will be the largest of any non-South African gold company.

Although the issue has not been priced yet, the $125 million(US) Morgan Grenfell expects will be raised dwarfs the initial offerings of Placer Pacific ($78.1 million in August, 1986), Newmont Gold ($47.5 million in June, 1986) and Freeport- McMoRan Gold ($40 million in July, 1985).

In fact, Cambior is the only one to come close with $105 million raised in July, 1986. Cambior, however, floated about 68% of its common stock in its initial public offering while the others have floated substantially less. Placer Pacific sold 21.4%, Newmont 5% and Freeport 10%.

Hemlo Gold’s initial float will be 12.4%, the 12 million shares Noranda plans to sell reducing its holding to just over 50%. About seven million of those shares will be sold in Europe and five million in Canada. None will be sold in the U.S.

In total market capitalization, Hemlo Gold will probably rank about third behind Newmont at about $1.7 billion and Homestake at about $1.3 billion. Echo Bay Mines is now ranked third at about $1.2 billion.

Although the price of the Hemlo Gold issue hasn’t been set yet, the market price of Golden Sceptre Resources might be a good indication of what the issue price will be. Golden Sceptre stock is being exchanged for Hemlo Gold stock on a share-for-share basis.

However, Sceptre is only turning over its Hemlo assets to the new company. It is establishing a new company, Golden Sceptre Minerals with the remaining assets which is expected to have a value of about $1(C) per share.

So, with Sceptre recently trading at $21.25, the Hemlo Gold issue should come out at about $20.25.

Michael Villeneau, an analyst with Morgan Grenfell, says because Noranda will hold more than a 50% interest in the new company, its dividend policy is expected to be relatively high. He suggests as high as 50% of cash flow, although that would translate into a “modest yield,” about 2%.

“Taking into account Hemlo Gold Mines’ size, long life, low costs and marketability, the company is likely to be a core holding in most gold portfolios and made at a premium rating,” says Mr Villeneau.

“At around $19, however, the upside potential would appear to be limited.”