Newmont bids for Fronteer

Newmont Mining (NEM-N) is the latest to join the wave of merger and acquisition activity that is washing over Canadian mining companies. 

In its friendly bid for Vancouver-based Fronteer Gold (FRG-T, FRG-X), Newmont  wants to get its hands on the junior’s Long Canyon gold project in Nevada, which it believes has Carlin trend-like metallurgical and geological characteristics. Others like analyst Richard Gray of Cormark Securities have described Long Canyon as “one of the highest quality, undeveloped oxide deposits in North America.” 

“Long Canyon holds the potential to grow beyond three to four times Fronteer Gold’s current stated resource estimate, with an attractive average gold grade of approximately 2.3 grams per tonne,” Richard O’Brien, Newmont’s president and chief executive, declared in a news release announcing the bid.

Fronteer’s Long Canyon project is about 161 km from Newmont’s existing infrastructure, which offers development and operating synergies.

Last month Fronteer published an interim resource estimate for Long Canyon with measured and indicated resources of about 1.4 million gold oz. and inferred resource of 80,000 gold oz.

Under the proposed deal, Fronteer Gold’s shareholders would receive $14 in cash and one share of a new company to be called Pilot Gold for each Fronteer share held. 

The cash consideration represents a premium of about 37% to Fronteer’s closing share price on Feb. 2, and values the company at about $2.3 billion.

If the transaction is approved, Fronteer shareholders will hold 80.1% of Pilot Gold with Newmont holding the remainder.

Pilot Gold will own a portfolio of Fronteer Gold’s exploration properties in Nevada, Turkey, and Peru and will have $10 million in cash – “sufficient  financial resources to immediately undertake active exploration programs,” said Mark O’Dea, Fronteer’s president and chief executive.

The news sent Fronteer’s shares surging $4.07 apiece or 39.7% to close at $14.32 per share, with 40.7 million shares trading hands. Over the last year, the company had traded between a low of $4.04 and a high of $12.22 per share.

In a research note to clients, Gray of Cormark Securities noted that there is “low probability” for a competing bid due to the price of the acquisition and the synergies involved. “The only company that we believe could enter the fray would be Barrick Gold (ABX-T, ABX-N), primarily to prevent its closest competitor from acquiring what could become the next significant mineralized trend in Nevada.”

Brian MacArthur, an analyst with UBS Research, described the proposed acquisition as a “good strategic fit” for Newmont. “The acquisition expands Newmont’s already substantial asset base and significant development and operational expertise in Nevada, a jurisdiction with relatively low political risk.”

MacArthur also said Newmont’s redeployment of cash is positive. “Given Newmont has more than enough cash to cover the transaction we believe the purchase is relatively neutral on an earnings per share and cash flow basis,” he wrote. “On a valuation basis, we view the transaction as accretive as Newmont has deployed cash that was previously just earning interest, into development assets, which get a higher multiple than cash.”

In addition to Long Canyon, Fronteer also owns a 100% stake in the Northumberland project and a joint-venture interest with Newmont in the Sandman project, also in Nevada, as well as assets in Turkey. 

Fronteer has total attributable measured and indicated gold resources of 4.2 million oz. and inferred resources of up to 1.7 million oz. at Long Canyon, Northumberland and Sandman.

Newmont operates six open-pit mines, five underground mines, and nine process facilities, in Nevada. Last year its operations in the state produced 1.7 million attributable gold oz., about 32% of the company’s total attributable gold production. 

This year Newmont has an exploration and development budget for near-mine activities in Nevada of roughly $285 million.

Fronteer’s board has unanimously approved the deal and shareholders in the company are expected to vote on the proposed transaction in early April.

A break-fee of $85 million has been written into the deal.