>> If anyone thinks this deal is going through at this price listen to the ABX CC. At about the 28th minute a guy from Neuberger Berman (owner of 11% of shares out) called in to ask questions. He seemed insulted that Barrick had not talked to them about this offer before announcing it. He closed by saying, "Good luck!" (in trying to amass 75% approval). <<
Glad we both held today and that we both agree that higher prices are coming still. I'm thinking something around 20 is about what we'll get even though a year from now I think we could get 25+ with POG above 600 and course much higher LT. I've got mixed emotions on this deal obviously.>>> ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Well then, it appears we have a quarem.... <vbg>
Barrick Bids for NovaGold, Offer Likely to Fall Short
By Ben Abelson 24 Jul 2006 at 02:47 PM EDT
NEW YORK (ResourceInvestor.com) -- Barrick Gold [TSX:ABX; NYSE:ABX] has announced it will bid US$1.5 billion to acquire NovaGold [TSX:NG; AMEX:NG], a well-known junior with two sizeable development-stage projects.
The all-cash hostile bid values NovaGold at US$14.50 per share, and is an attempt by Barrick to significantly increase its reserve base in North America. If successful, Barrick would lock-up the remaining 30% interest in the Donlin Creek project in Alaska, while acquiring 100% of NovaGold’s Galore Creek project in British Columbia.
All told, Barrick would add 25.5 million ounces of measured, indicated and inferred gold, 181.5 ounces of silver, and 13.4 billion pounds of copper to its reserve base.
The bid was the latest among a flurry of mergers and acquisitions news to hit the mining industry, which has been most recently focused on the ongoing bidding war in the base metals sector among Phelps-Dodge [NYSE:PD], Inco [TSX:N; NYSE:N], Xstrata [LSE:XTA], Falconbridge [TSX:FAL; NYSE:FAL] and Teck Cominco [TSX:TCK-B; NYSE:TCK].
Like other deals, however, it seems more than likely that Barrick’s first offer for NovaGold is likely to fall short. Investors should look forward to a protracted takeover battle on the horizon.
Barrick’s Hostile Bid Could Be Rebuffed by Shareholders
Barrick’s bid was a bit surprising to the investment community, especially as it comes on the heels of its Placer Dome acquisition just months ago. The move suggests that Barrick, anticipating higher metals prices, is eager to take advantage of the recent weakness in equity prices.
At the current bid price NovaGold management and shareholders probably have other ideas in mind. While Barrick’s offer represented a 24% premium to NovaGold’s July 21 closing price, it’s still a substantial discount to where that company’s shares traded throughout the spring. By midday Monday, shares of NovaGold traded as high as US$15.65, an 8% premium to Barrick’s offer.
In a conference call following the announcement, Barrick revealed that it had entered preliminary acquisition talks with NovaGold earlier in the year. Given that the two companies couldn’t come to terms then, and that current NovaGold management are sizeable shareholders, it’s unlikely that management will tender their shares at what they perceive to be an unfair price. Institutional shareholders may be similarly hesitant. In the same conference call representatives from Neuberger Berman, which owns substantial stakes in both companies, expressed some skepticism at the bid’s chances for success.
Given that Barrick’s bid requires 75% of NovaGold’s shares be tendered, any decent resistance could quickly force Barrick to up its offer price.
Both Donlin Creek and Galore Creek represent two of the few remaining undeveloped, large-scale North American gold assets. As such, it’s likely that other North American majors could try and wrest NovaGold out of Barrick’s hands. Goldorp [TSX:G; NYSE:GG], Newmont Mining [NYSE:NEM], and Kinross Gold [NYSE:KGC; TSX:K], all have the financial capability to emerge as a white knight.
Barrick President and CEO Greg Wilkins has said his company’s offer price is “a full reflection of the opportunity, and the risks associated with the opportunity.” However, it’s likely that Barrick management realizes that a bidding war may emerge – and recognizes that their offer only represents the first shot in a long salvo.
Alex Turkeltaub, an analyst with resource consulting firm Frontier Strategy Group, told Resource Investor that while there may be some negotiations over price he views the offer as a reasonable one.
“For Barrick shareholders, this deal makes a lot of sense so long as the company does not overpay if a bidding war ensues. Gaining quality reserves in a stable political climate is a clear positive for the company, especially considering that most other potential acquisitions are in far riskier places.
“For NovaGold shareholders, given the all-cash nature of the offer, the major risk is that they won't share in the upside if gold prices continue rising; on the other hand, they are completely protected in case the commodity cycle ends quickly. The key question for these individuals is where they see gold prices moving in the next 12-36 months," said Turkeltaub.
Most significantly, Turkeltaub added, the deal gives Barrick geographic flexibility in future acquisitions. By building up its resource base in North America, Barrick gains the ability to further diversify its portfolio into emerging markets without significantly adding to the company’s political risk.
Bid Specifics; Barrick to Grab Pioneer Metals
Beyond acquiring the remaining interest in Donlin Creek and the entirety of Galore Creek, a successful bid would also give Barrick control of several smaller exploration stage projects in Alaska, about US$185 million in cash, and US$65 million in investments. With the acquisition, Barrick’s North American measured and indicated gold resources would increase 54% to 34.7 million ounces, while inferred resources would rise 89% to 28.2 million ounces.
At the same time of the NovaGold bid, Barrick also announced that management and key shareholders of Pioneer Metals Corp. [TSXv:PSM] had accepted a C$1 per share takeover bid by Barrick, representing a 54% premium to Pioneer’s July 21 closing price. Since over 40% of shareholders have already accepted Barrick’s bid, it seems likely that the all-cash, C$65 million deal will go through.
The deal would give Barrick control of Pioneer’s Grace project, which is located adjacent to the Galore Creek, and is necessary for infrastructure development on the property. (NovaGold and Pioneer are currently involved in litigation over a joint venture on the Grace project, and NovaGold had previously submitted a hostile C$0.57 bid for Pioneer).
While shares of Pioneer traded as high as C$1.04 on Monday morning, by midday they had settled to C$0.99.
Conclusion
Barrick’s grab for NovaGold is just the latest bid to hit the front pages in the mining community. But with acquisition battles becoming more and more of the norm, and with miners and investors alike anticipating ongoing strength in metals prices, it’s unlikely that Barrick management will be able to ensnare NovaGold’s sizeable assets with its current bid. Investors should expect the merger frenzy to only continue from here.
*As of 23 July 2006, NovaGold has no recorded proven and probable reserves. Resource Investor converted 80% of M&I resources to P&P reserves and assumed an annual production forecast of 750,000 ounces of gold based on company estimates from Donlin Creek, Galore Creek, Rock Creek and Nome Gold projects. RI calculated an average cost of $291/oz, based on information from the company website, accounting for 15% inflation.
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