(Fri 6:48am NXG Northgate Minerals upgraded by UBS - Briefing.com)
Northgate Could Surge With Aurizon Buyout
By Ben Abelson 23 Jun 2006 at 09:57 AM EDT
NEW YORK (ResourceInvestor.com) -- When July 7 rolls around, shareholders in Northgate Minerals [AMEX:NXG; TSX:NGX] should be hoping that the company's takeover bid for Aurizon Mines [AMEX:AZK; TSX:ARZ] has closed. If not, the Vancouver-based mining company could be in for some investor backlash.
For several years now, Northgate has been the red-headed step child of the junior producer circuit. The company has been perpetually under appreciated by analysts for its one-mine status and high copper production, and is valued substantially below nearly comparable mid-tier mining companies. For Northgate, an acquisition of Aurizon - and its near-production Casa Berardi project - is key to a valuation re-rating.
In the case of Northgate and Aurizon, the upside for shareholders of both companies could be significant. At current metals prices, Northgate is trading at about its net asset value. Mid-tier gold producers typically trade at 1.3 times to 1.5 times NAV - meaning that the upside could be in the neighbourhood of 50%. While this re-rating will probably take several months to emerge, it could provide momentum for the stock to gain even during a flat gold market.
The only problem with this dream scenario? Aurizon's board has fought back strongly against Northgate's hostile manoeuvre. In a recent news release, Aurizon CEO David Hall called Northgate's bid undervalued, saying it would "dilute their ownership in Casa Berardi just as it is about to go into production, while exposing our shareholders to a host of new risks and uncertainties." Hall also claimed that in making the bid Northgate was in violation of a confidentiality agreement that the company signed when it first approached Aurizon about a friendly takeover last October.
Northgate CEO Ken Stowe lashed back a few days later, highlighting the offer's potential to create a financially solid, mid-tier company that would benefit all shareholders. He also took the opportunity to point out that Aurizon's management interests may not be exactly aligned with outside shareholder interests - noting that several members of the management team have been selling shares since the first Northgate bid last October.
Valuation
When Northgate made its bid public, the all-stock deal valued Aurizon at a 30.5% premium. Today, Aurizon currently trades at $2.56 on AMEX, about 3% above Northgate's offer price of $2.49 (the deal proposes to exchange 0.741 shares of Northgate for each share of Aurizon).
Given the current discount, investors may be holding out hope that another prospective suitor will emerge in the next two weeks. Aurizon has said it is pursuing other strategic alternatives, and the list of possible buyers could include other miners with Quebec-based operations (where Casa Berardi is located), such as Agnico-Eagle Mines [NYSE:AEM; TSX:AEM].
There's also the outside chance that Northgate will up its bid to wrest control of Aurizon.
Benefits of a Merger
It may be 'do or die' time for Northgate. For several years, CEO Ken Stowe has promised investors he's been looking for an accretive acquisition in North America. The "problem" is that Stowe is highly value-oriented, and hasn't been willing to pay up for an acquisition that wouldn't create a solid return for shareholders. By adding Casa Berardi to its portfolio, Northgate would morph into a nicely diversified mid-tier miner - with operating assets at Kemess South and Casa Berardi, and solid development stage projects at Kemess North and Young-Davidson.
Without a merger, Northgate remains a single mine shop. While Kemess South is highly profitable, and spins off tonnes of cash, the mine is nearing the end of its life - and will probably cease production by 2009 or so. Northgate is still in the process of making a development decision on Kemess North, which lies next door. The risk for shareholders is that Kemess South closes down, and Kemess North never gets started up. Without the addition of a solid, near-operation mine, Northgate isn't likely to see a re-rating anytime soon.
But while the management of Aurizon has come out strongly against a merger, the deal would likely be beneficial to shareholders of that company as well. While it’s true that shareholders' stake in Casa Berardi would be diluted, current shareholders would be getting a piece of an up-and-coming mid-tier producer slated to churn out near 500,000 ounces of gold in 2007. And while shareholders wouldn't be getting the same kind of upside leverage as they had with Aurizon alone, the New Northgate would be capable of putting itself on the map.
Conclusion
Of course, the bottom line is that with the long term gold-bull in place, miners are definitely in a seller's market. Aurizon has other strategic options if the Northgate bid falls apart. With a shortage of near-development North American assets on the market, Northgate is in a must-win position when it comes to Casa Berardi.
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