Lihir agrees to improved Newcrest offer (May 24, 2010)

Papua New Guinea-focused Lihir Gold (LGG-T, LGL-A, LIHR-Q) has agreed to be acquired by Newcrest Mining (NCM-A), which has projects in Australia, in a deal that values the former at A$9.5 billion.

Newcrest has been after Lihir since February when it made its initial bid in an all-share deal worth A$9.2 billion. Lihir publicly rejected the offer on April 1 and has retained the ability to continue existing discussions with third parties until June 8.

David Haughton, an analyst with BMO Capital Markets says the deal was bound to go through eventually.

“It was pretty clear from the time that initial deal had been proposed on the first of April, that it was an outcome where just topping up the offer should have resulted in Newcrest getting Lihir,” Haughton says, noting, “I thought the initial offer announced on the first of April was a pretty good one.”

Under the revised deal, Lihir shareholders will receive one Newcrest share for every 8.43 Lihir shares they own plus A22.5¢ less any interim dividends for the half year ending June 30.

If the deal goes through, the combined company will be a leading gold producer in the Asia-Pacific region with a base load annual production of 2.5 million oz. gold.

Lihir’s flagship mine is on Lihir Island in PNG. It’s a 2 km by 1.4 km open-pit mine that produced 853,000 oz. gold in 2009. Lihir also has smaller projects in Australia and the Ivory Coast in West Africa.

Newcrest is the top gold producer in Australia. Its Cadia Valley mine produced 532,000 oz. gold and 57,000 tonnes of copper in 2009 while its next biggest operation, the Gosowong gold mine, produced 400,000 oz. gold.

Buying Lihir is especially beneficial for Newcrest, which earns about 25% of its earnings from base metals and the rest from gold. The company’s growth plan includes added copper production, which would have had a negative impact on the premium in the market given to precious metals miners over base metals miners.

“The strategic benefits they outlined of diluting copper exposure was compelling from their point of view and Lihir succeeded by getting the higher offer,” Haughton says.

Consultant Grant Samuel will be conducting a due diligence review until June 8 and will be considering the newly proposed Resource Super Profits Tax in the assessment.

The new tax was announced on May 2 and would mean a 40% tax rate levied on most mining profits on top of the corporate tax rate, which would be reduced to 28% from 30%. The new tax would be applied to projects already up and running.

Newcrest chief executive Ian Smith told the Australian publication Business Day on May 5 that he was prepared to lobby the government furiously and relentlessly over its plans to take an additional A$12 billion from the sector in a span of two years starting in 2012.