Two Australian miners spurn major takeover bids

Vancouver – Go big or don’t bother – that seems to be the message to any company thinking of bidding for an Australian producer after two Aussie-listed companies rejected sizeable takeover offers at the end of March, one of which led to a sweetened bid.

Lihir Gold (LGL-A) rejected an offer from fellow Australian gold miner Newcrest Mining (NCM-A) that would have seen Lihir shareholders get one Newcrest share for every nine Lihir shares held, plus A22.5¢ for each share. Based on Newcrest’s closing share price on March 31, the offer valued Lihir shares at A$3.87 and the company at A$9.2 billion.

Lihir rejected the offer within days because the company’s directors “unanimously determined that the offer did not represent good value for LGL shareholders.”

The deal, if consummated, would have been the biggest merger or acquisition deal in the gold sector since Goldcorp (G-T, GG-N) bought Glamis Gold in November 2006.

And Peabody Energy (BTU-N) offered A$13 a share to take over Macarthur Coal (MCC-A), a major pulverized coal injection (PCI) coal producer, but Macarthur rejected the offer. A few days later Peabody sweetened the deal, upping the offer to A$14 per share to value the coal miner at A$3.56 billion.

The new offer constitutes a 22% premium to Macarthur’s 30-day, volume-weighted average share price up to Mar. 30, when Peabody announced its original bid. The ball is now in Macarthur’s court; the company has to make some kind of decision before April 12, the date of a shareholders’ meeting to vote on a different acquisition that Peabody opposes. If the meeting is held and Macarthur shareholders vote to continue with the takeover of Gloucester Coal (GCL-A), the Peabody offer will lapse.

Macarthur signed the all-share deal for Gloucester deal in December, working with the company’s 87.7% shareholder Noble to ink a deal valuing Gloucester at A$670 million. The deal still requires shareholder approval; Peabody is opposed to the move because it thinks the deal has Macarthur paying too much.

Macarthur already operates two coal mines in Queensland and is one of the world’s largest producers of PCI coal, which is used to make steel. The company is also developing new mines and plans to double production in five years.

In the week following the initial Peabody offer, Macarthur’s share price jumped from the A$12 range to over A$15. Macarthur has 254 million shares outstanding.

Going back to the Lihir takeover bid, Lihir’s chairman, Ross Garnaut, said in a statement that the Newcrest offer undervalued Lihir “both in terms of its existing business and in terms of the potential value the company expects to deliver to shareholders in the future.”

Lihir was incorporated to develop a mine at its project on Lihir Island, in the New Ireland province of Papua New Guinea, which it has done. Production from oxide ores at Lihir commenced in early 1997; by the end of the year the mine was also extracting gold from sulphide ores. In fiscal 2008 the mine produced 771,000 oz. gold and still boasts 28.8 million oz. gold in reserves and 43 million oz. gold in measured and indicated resources.

In recent years Lihir has added to its portfolio with two acquisitions. In early 2007 the company took over Ballarat Goldfields, which owned the Ballarat East underground gold mine and three nearby exploration projects. The Ballarat mine produced 12,565 oz. gold in 2009, though the company since sold it for A$4.5 million and a 2.5% net smelter return capped at A$50 million.

And in mid-2008 Lihir acquired Equigold for its Mount Rawdon open pit gold-silver mine in Queensland, its Kirkalocka assets in Western Australia, its brand-new Bonikro open pit gold mine in Cote d’Ivoire, and its 15,350-sq. km prospective land package in Cote d’Ivoire. Lihir has since sold the Kirkalocka assets but Mount Rawdon and Bonikro are still operational, producing roughly 100,000 oz. and 130,000 oz. gold each year respectively.

Even while it closed two successful acquisitions, Lihir never took its attention away from its flagship mine. In 2009 Lihir’s capital expenditures totalled A$373.5 million, of which more than half went towards the Lihir mine. Gold at Lihir is primarily hosted in refractory sulphide ore that must be oxidized before the gold can be leached out with cyanide. In 2007 the company increased its capacity at Lihir by 3 million tonnes per year by adding grinding, flotation, and oxygen capacities. Now the company is expanding the operation again, with the goal of increasing production to 1 million oz. annually, by installing an additional autoclave with double the capacity of each of the three existing autoclaves. The Million Ounce Plant Upgrade or MOPU project, as it is known, is expected to take four years and will cost US$700 million.

In 2010 the company expects to spend A$640 million, of which A$600 million will go into finishing the upgrades at the Lihir mine. Lihir expects to fund this entire commitment from operating cash flows and cash on hand, which totalled A$473.5 million at the end of 2009.

The MOPU project is the key component of Lihir’s plans to increase its gold output by 50% over the next ten years. Once the MOPU is complete in 2012, Lihir will be producing 1.45 million oz. gold annually. By 2016, its output will increase a bit more, to 1.5 million oz., through a planned, $100-million expansion at the Bonikro mine in Cote d’Ivoire. The company’s cash costs to produce an ounce of gold averaged US$397 last year.

In rejecting the Newcrest offer, Lihir’s chairman stressed the company’s recent efforts to improve its market valuation.

“LGL has an excellent portfolio of operating mines in three countries and has achieved record performance outcomes every year for the past four years, reaching output of 1.124 million oz. in 2009,” said Garnaut. “The board is strongly of the view that LGL is undervalued in the marketplace. We have recently made management changes and taken other steps that will assist us in the process of rebuilding market confidence and correcting that valuation shortfall.”

News of the Newcrest offer lifted Lihir’s share price to A$4 from A$3.05 in the space of a few days, though it then settled slightly to A$3.80.

Newcrest is Australia’s largest gold producer and sits as one of the world’s top ten gold companies in terms of production, reserves, and market capitalization. As of the middle of 2009 the company boasted reserves containing 42.8 million oz. gold and 4.67 million tonnes of copper, within a global resources hosting 80 million oz. gold and 14.4 million tonnes copper.

Newcrest operates six mines, five in Australia and one in Indonesia. In its 2008-2009 fiscal year those mines produced 1.63 million oz. gold at an average cash cost of US$350 per oz., as well as 90,000 tonnes copper. It target for the current year is 1.8 to 1.9 million oz. gold.