New Gold to merge with Western Goldfields

New Gold (NGD-T) and Western Goldfields (WGI-T) are joining forces to create a diversified gold production base from three gold mines in mining friendly jurisdictions with forecasted gold production of 335,000 ounces this year and more than 400,000 ounces in 2012.

Under the plan of arrangement, New Gold will acquire all of the outstanding shares of Western Goldfields in exchange for one New Gold share and C$0.0001 in cash for each share of Western Goldfields.

Once the deal is complete, New Gold and Western Goldfields shareholders will own roughly 58% and 42% of the combined company, respectively.

Based on New Gold’s closing price of C$2.30 per share on the Toronto Stock Exchange on March 3, the day prior to the announcement, the offer represents a 19.2% premium to the closing price of Western Goldfields’ shares on the TSX on March 3, and a 20.1% premium to the 20-day volume-weighted average trading price of both companies’ shares on the TSX.

In mid-day trading in Toronto, news of the deal sent New Gold shares down 21¢ or 9.1% to C$2.09 per share, while Western Goldfields shares jumped 8¢ or 4.2% to C$2.01.

In a press release today the companies said the merger would “deliver on industry consolidation in a rising gold price environment” and combined “experienced management teams and boards of directors.”

The deal also enhances the companies’ market presence and enriches the combined company’s mineable reserves to 7.6 million ounces of gold within a measured and indicated resource of 12.2 million oz. gold.

Robert Gallagher, president and chief executive officer of New Gold said the merger was “in line” with the company’s growth strategy and vision of “becoming a million ounce gold producer by 2012.”

“This represents significant value for New Gold and Western Goldfields shareholders with greater leverage to gold in a larger intermediate gold mining company, diversified production in mining-friendly jurisdictions, and strengthened financial position,” he said.

Randall Oliphant, chairman of Western Goldfields noted that the business combination provided both groups “with exposure to a very exciting development project in New Afton and cash flow sufficient to fund its development.”

The new company’s executive management will be made up of Oliphant as executive chairman; Gallagher, as president and chief executive officer; Brian Penny, as executive vice president and chief financial officer; and James Currie, as executive vice president and chief operating officer.

The board of directors will consist of six current directors of New Gold and four current directors of Western Goldfields.

The combined company will have a pro forma balance sheet at December 31, 2008 with cash of US$171 million, long-term investments in asset-backed commercial paper of US$77 million and debt of US$275 million, consisting of US$7 million of short term borrowings, US$154 million face value of senior secured notes, US$45 million face value of convertible debentures and US$69 million of project financing.

Upon completion of the transaction, New Gold will have approximately 348 million shares outstanding (436 million fully-diluted).

The new company will have a group of properties including Western Goldfield’s sole asset, the Mesquite mine in Imperial County, California. The mine started production last year and this year it is forecast to produce between 140,000 and 150,000 oz. gold at an estimated total cash cost of between US$530 and US$540 per ounce. Capital expenditures in 2009 are expected to be in the range of US$1.5 million.

It will also own the Cerro San Pedro gold-silver mine near San Luis Potosi in central Mexico, which this year is forecast to produce between 90,000 and 100,000 ounces of gold and between 1.1 million and 1.3 million ounces of silver at an estimated total cash cost of
US$550 to US$570 per ounce of gold net of by-product sales. Capital expenditures this year are expected to be about US$2.8 million.

In Australia, the combined company will own Peak Mines in the Cobar gold field of central west New South Wales. The mine is forecast to produce between 90,000 and 100,000 ounces of gold and between 13 million and 15 million pounds of copper in 2009. Total cash costs are expected to be in the range of US$370 to US$390 per ounce of gold net of by-product sales from production associated with the Chesney and Perseverance ore bodies. Capital expenditures this year are expected to be roughly US$24.5 million.

The New Afton gold-copper project in Kamloops British Columbia will be the flagship development project. Full production is expected to begin in the second half of 2012.

New Afton will be an underground mine, which is anticipated to produce an annual average of 75 million pounds of copper, 80,000
ounces of gold, and 214,000 ounces of silver. This year it is believed that expenditures will run to about US$59.2 million.

Other projects include El Morro, a copper-gold development stage project in northern Chile. New Gold owns a 30% stake in the project with its joint-venture partner and project operator, Xstrata Copper, which owns the remaining 70%. An environmental impact study was submitted on El Morro in the fourth quarter of 2008.

Over the last 52 weeks, New Gold has traded in a range of 94¢-C$9.75 per share, while Western Goldfields has traded in a band of 50¢-C$3.90 per share.