Off subject,
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Placer Dome doubles reserves with
$235M South African deal
Gold price drops, as does company's share price
By JOHN SCHREINER
The Financial Post
VANCOUVER -- Placer Dome Inc. has made a stunning entry -- the first for a senior
North American producer -- into the South African gold industry with a $235-million
(US) investment that doubles its total reserves to 60-million ounces at an acquisition
cost of only $8 (US) an ounce.
The deal, a 50% interest in Western Areas Ltd. of Johannesburg, is the single largest
investment in South African gold mining by a North American producer. It will draw
Placer Dome level in reserves with Barrick Gold Corp. of Toronto, whose only
exposure to South Africa is an exploration venture with Anglo Gold Ltd.
Placer Dome will manage the joint venture with Western Areas, including an
operating gold mine producing about 600,000 ounces a year and South Africa's
largest known undeveloped gold property, the South Deep property.
"South Deep is a fine, world-class asset," said John Willson, Placer Dome's president
and chief executive. "That's our primary reason for making this acquisition."
The company is funding the acquisition from current cash. Mr. Willson said this
equals about six months of the firm's cash flow and does not jeopardize the
development of the Las Cristinas gold mine in Venezuela or any other acquisitions.
The deal, with Placer Dome getting 50% of production, immediately raises the
company's target output for 1999 by 300,000 ounces to 2.9 million at an average cash
production cost of $170 (US) an ounce. It will use the cash from this production to
fund its share of a $300-million (US) development of South Deep, which is expected
to produce 750,000 ounces a year when it starts in 2002. Placer Dome aims to
increase that to one million ounces in its optimization studies.
"Technically, this is probably a great acquisition for Placer Dome," said Richard
Cohen, an analyst with Dundee Securities Inc. in Vancouver. "This is an exceptional
property. It can be mechanized to a high degree."
The initial reaction of the market to the announcement, which coincided with a drop
in the gold price, was negative. Placer Dome shares declined $1.25 on the Toronto
Stock Exchange yesterday to close at $22.25.
"It is possible the gold price was down in reaction to this deal," Mr. Cohen said,
suggesting Placer Dome's move could quickly pull other North American majors to
South Africa, potentially increasing total gold production.
"Placer's there now," Mr. Cohen said. "If Placer's first, one can only imagine who is
second."
Vince Borg, Barrick's spokesman, said: "We are always on the lookout for any
acquisition opportunities. We haven't determined one yet."
Western Areas has been looking for a means to fund the development of South
Deep, with reserves of 59 million ounces, and has had difficulty attracting financing
because of the risk attributed to South Africa and to underground mining there.
"The South African industry has been caged in for many decades," said Brett Kebble,
the deputy chairman of Western Areas. Placer Dome "will be able to inject new life
into our assets."
Mr. Willson acknowledged Placer Dome has entered South Africa "ahead of popular
market opinion. We have constantly said in any move into South Africa, we would
enter gently and our exposure would be limited. The potential rewards of this initial
investment far outweighs the risk." |
