Lihir Gold Ltd agreed to buy smaller West African gold miner Equigold NL for $1 billion, as it seeks to increase production and expand outside its base in Papua New Guinea.Lihir, which mined about 700,000 ounces of gold last year from inside a dead volcano rich in ore on PNG's Lihir Island, has long sought to spread out to other regions, buying the promising but so far non-producing Ballarat gold mine in Australia in 2006.
“The deal provides Lihir with the real geographical and operational diversification that it was seeking when it did the Ballarat deal and significant exploration upside,” Citi mining analyst Jonathan Battershill said in a client note.
Lihir said it would offer 33 of its shares for every 25 Equigold shares, valuing Equigold at a 24% premium to its Wednesday close.
The deal comes in a week when bullion prices traded to a record high of $1,030.80 an ounce on rising concerns of a US-led economic recession, allowing unhedged gold miners such as Lihir to bask in the metal's afterglow, according to analysts.
The combined group would see annual production of more than 1.2 million ounces.
Gold has since recoiled to around $930 an ounce, though some see the price rebounding.
“The fundamentals that drove gold up are not going to go away overnight,” said Eagle Mining Research analyst Keith Goode.
Lihir in September spent $886 million to unwind gold hedges taken out at prices well below today's heady levels and gain exposure to market prices.
While hedging can protect against price falls, it also means it can miss out when bullion rises.
Hood said he would assess about 320,000 ounces of gold hedged by Equigold if the merger proceeds.
Directors of Equigold and Lihir have unanimously backed the tie-up. Analysts said the friendly nature of the acquisition comes as no surprise despite a number of hostile overtures in the Australian mining sector recently.
“A lot of investors think gold stocks are over-valued, so if you are merging you want to be able to perform due diligence and use your own paper to maintain the P-E (price-to-earnings) premium gold stocks are trading for,” said a mining analyst familiar with the deal but not authorized to speak to the media.
The combined group, with 25 million ounces in gold reserves and operations in PNG, Ivory Coast, and Australia, would have a market value of about $8.2 billion.
Lihir has committed nearly $1 billion to expand its Papua New Guinea mine, as well as focusing on diversification.
“We don't think we are running away from Papua New Guinea,” Lihir's chief executive, Arthur Hood, told reporters.
Equigold chairman Nick Girogetta said Lihir would bring needed “financial muscle” to develop its Ivory Coast mines.
The Bonikro project in Ivory Coast, in which Equigold has an 85% stake, is due to start up in July, with annual output expected to climb to around 150,000 ounces in next year.
“This ground is true first mover stuff and should yield some significant discoveries,” said Battershill, who has placed a hold/high risk recommendation on both stocks.
The cost of mining gold on a cash level for the merged group was expected to remain competitive at less than $350 an ounce for Lihir's projects and about $330 an ounce from 2009 for Equigold, Girogetta told reporters.
Lihir's stock was down nearly 11% to $3.2, reflecting the sharp fall in gold prices, while Equigold was up 8.4% to $4.24 on the back of the offer.
Lihir is being advised by Caliburn Partnership. Equigold is being advised by Euroz Securities. (Reuters)