Result will be continent’s fifth-largest gold producer — Hemlo joins Battle Mountain in latest merger

Merger mania appears to be gripping the mining industry. In addition to the proposed marriages of Diamond Fields (TSE) with Falconbridge (TSE) and Eldorado (TSE) with Gencor, two middle-tier North American gold companies have agreed to join forces.

Hemlo Gold Mines (TSE) and Texas-based Battle Mountain Gold (NYSE) will merge to form North America’s fifth-largest gold producer, with production for the current year projected to exceed 1 million oz. Moreover, cash production costs in 1996 will be kept below US$185 per oz., making the new company one of the lowest-cost producers of the yellow metal.

The new entity, to be called Battle Mountain Gold Company, will have proven and probable reserves of more than 13 million oz., with an additional 4 million oz. under evaluation. The company, to be based in Houston, will have nine producing gold mines in five countries and operate exploration programs throughout the Americas, the Western Pacific and West Africa.

The proposed $2.1-billion stock-for-stock merger will see Hemlo shareholders receive 1.5 Battle Mountain shares for each Hemlo share held. Based on the closing price of the stock the day before the offer was made, the offer represents a cash value of $21.03 and gives Hemlo shareholders a pre-announcement premium of 20.4%.

Most analysts contacted by The Northern Miner said they expect Hemlo’s shareholders to approve the merger, yet few were certain how Battle Mountain’s shareholders would respond. “It seems rich to me,” quipped one senior mining executive who asked not to be identified. “It’ll be interesting to see whether Battle Mountain shareholders agree.”

Hemlo’s chief executive officer, Ian Bayer, described the combination as a “perfect fit,” noting that Battle Mountain’s strength in surface mining and Hemlo’s strength in underground operations add value to the new entity.

Undoubtedly, the foremost benefit for both companies will be the prestige that will result from being a company that produces in excess of 1 million oz. per year.

In 1995, Battle Mountain’s attributable production was 486,000 oz. gold, 1.7 million oz. silver and 12.6 million lb. copper from six mines in North America, Bolivia and Australia.

More than 298,000 oz. were derived from the company’s 88%-owned Kori Kollo gold-silver mine in Bolivia. Its other operations include: the Battle Mountain complex in Nevada; the San Luis in Colorado; the Pajingo in Australia; a 51.4% interest in Red Dome in Australia; and a 51.4% interest in San Cristobal in Chile.

Hemlo holds interests in two Canadian gold mines that produced, in total, almost 256,000 oz. in 1995.

Problems resolved

In 1995, production at the Golden Giant mine, near Marathon, Ont., plummeted to 233,700 oz. from the previous year’s level of 446,900 oz. The shortfall was caused by a 15-week strike and a 7-week shutdown for shaft repairs. With these problems now resolved, Hemlo expects to contribute 430,000-450,000 oz. to the combined company in 1996.

Hemlo’s other asset is a 55% interest in the Silador gold mine in northwestern Quebec.

In addition to the producing mines, the new company will have six mines at either the development or the permitting stage. These include: a 10.3% interest in the Lihir project in Papua New Guinea; a 60% indirect interest in the New World project in Montana; and a 85% interest in the Holloway joint venture in northeastern Ontario.

The Lihir is one of the largest undeveloped gold deposits in the world, with proven and probable reserves of 114.6 million tons averaging 0.128 oz. gold per ton. The mine is expected to be up and running in 1997 with initial oxide gold production expected in July. This will be followed by production from sulphides beginning in December. Battle Mountain’s gold yield from Lihir will be about 40,000 oz. in 1998.

EIS awaited

Hemlo’s interest in the New World project is through its 60% ownership of Crown Butte Resources (TSE). That company acquired the project in 1987 and has been going through the environmental permitting process since late 1993. Karl Elers, chief executive officer of Battle Mountain, intends to press for the issuance of the environmental impact statement and advance development of the project. Many analysts think a U.S.-based company will have a greater chance of success in dealing with U.S. federal and state regulatory agencies, and with U.S.-based environmetal lobbyists.

The Holloway joint venture has proven and probable reserves of 6.4 million tons averaging 0.2 oz. gold per ton, and is expected to be up and running by the second quarter of 1996. Once fully operational, the mine is expected to crank out 100,000 oz. annually at an operating cost of US$200 per oz. Of this amount, the merged company will receive about 85,000 oz.

Potentially, these six projects could boost production by 25% above 1996 levels as early as 1998.

The transaction has already been approved by the directors of both companies, as well as by Noranda (TSE), Hemlo’s major shareholder. Under the proposed plan, Noranda will convert its 44.1% interest in Hemlo into a 28% interest in the new company.

The merger is expected to close by June 30, when shareholders of Hemlo will have the option of receiving either Battle Mountain common shares or Hemlo exchangeable shares. The latter can be swapped for the former at any time.

Hemlo’s Canadian shareholders will benefit from the fact that the exchangeable shares will not be classified as “foreign property.” The transaction will also be completed in such a way that taxes are kept to a minimum, if not eliminated, for most Canadian and U.S. shareholders.