(UPDATE) Some Gold Firms See Glitter In Rivals' Cheap Stocks
Dow Jones Online News, Monday, December 29, 1997 at 03:19
By Bob Ortega
Staff Reporter of The Wall Street Journal
Gold companies are down, but they aren't out of the action.
Last week, Homestake Mining Co. said it agreed to acquire Plutonic
Resources Ltd. of Sydney, Australia, for $640 million in stock. And
several other, mostly large gold companies say they are exploring
acquisitions.
Gold stocks generally have been beaten up as the price of gold has
fallen below $300 an ounce to 18-year lows. But the most efficient gold
companies see a chance to snap up promising reserves at reasonable
prices, which could help cut their production costs. "We see this as an
opportunity to pick up some good properties," said Karen Gross, a vice
president at Royal Gold Inc. of Denver. "We're looking all over."
Prudential Securities Inc. analyst J. Clarence Morrison said he sees
Amax Gold Inc., Echo Bay Mines Ltd., Getchell Gold Corp., Crown
Resources Corp., Golden Star Resources Ltd. and TVX Gold Inc. as
potential targets. Many of these companies, along with other U.S.,
Canadian and Australian producers, are shutting down less-efficient
mines, laying off workers, deferring projects and cutting back on
exploration.
Echo Bay Mines, for instance, will lay off 100 of 450 workers at its
McCoy/Cove mine in Nevada in January, with another 20 to 30 layoffs to
follow next year, said a spokeswoman. Two development projects will be
deferred. "Everything is being reviewed across the board," she said.
Getchell Gold, Denver, recently announced it would lay off 100
employees, one-fifth of its work force. "That makes them look more
attractive for a possible takeover," said Michele Stell, managing
director of the Denver Gold Group, a trade association.
Some companies are seen as potential predator and prey. Amax Gold of
Denver is viewed as a takeover target not only because of its attractive
assets, but also because its stock has been battered, falling below $2 a
share in early December, from $7.625 a share last February. But Amax
says it is looking for additional properties even as it cuts spending.
The company benefits from a hedging program that allows it to get $25 to
$30 an ounce over the spot price. And it produces gold at an average
cost of less than $200 an ounce, thanks largely to two new mines in
Alaska and Russia with average production costs of $190 an ounce. "We've
worked hard on our costs for times just like these," said spokesman Mike
Rounds.
Battle Mountain Gold Co., Houston, also has positioned itself to
weather the storm while looking for good deals. The company closed three
mines in the last year and will close a Chilean mine in January. Battle
Mountain cut its exploration budget for next year to $25 million from
$35 million and narrowed its targets to eight countries from 16. Still,
said Ian Bayer, president and chief executive officer, "We believe we
can grow in this environment." The company would pay for any acquisition
in stock rather than cash, Mr. Bayer said.
Some analysts said that Homestake's purchase of Plutonic shows that
acquisitions these days are likely to use stock rather than cash; buyers
will need their cash reserves to develop whatever properties they
acquire. And while stock prices are low, even for healthier companies,
Ms. Stell said potential acquirees aren't likely to balk at stock
because of its high potential for rebound.
And many higher-cost mining companies are in such straits "that it
would be difficult for their shareholders to avoid taking stock if a
deal came along that was attractive," said Mr. Morrison of Prudential.
The most attractive targets have proven low-cost reserves that would
lower the acquiring company's average production cost. Daniel McConvey,
an analyst at Goldman Sachs who doesn't expect a gold rebound soon, said
that Canadian and Australian accounting rules don't usually allow
acquiring companies to pool their accounting with companies they buy;
that gives U.S. gold companies a financial edge because they don't have
to write off acquisition premiums as goodwill.
But analysts don't expect a raft of purchases because many of the
available properties may be too expensive to develop at current prices.
"We're looking for our next property," said William Reid, president and
chief executive officer of U.S. Gold, a small Golden, Colo., company
with a 40% stake in one mine not yet in production. "But we'll have to
be much more selective."
Meanwhile, at least two of the biggest companies most often touted as
potential buyers, Newmont Mining Corp. and Barrick Gold Corp., say they
aren't actively shopping.
Newmont, the biggest gold-mining concern outside of South Africa,
also is one of the lowest-cost gold producers, with an average cost of
about $188 an ounce. But Newmont executives, thinking that the low gold
prices wouldn't last, didn't engage in much forward-selling, so now they
are concentrating on cutting costs.
Newmont cut its quarterly dividend Dec. 2 to three cents from 12
cents a share, which would save it $60 million over a year. Doug Hock, a
spokesman, said the company may defer a planned joint venture in
Uzbekistan, and may trim its exploration budget for next year from $102
million this year, though it is not clear by how much. Mr. Hock said any
cuts won't affect the company's Nevada operations, its massive Batu
Hijau project in Indonesia, or its Minera Yanacocha mine in Peru, which
will produce one million ounces of gold this year at a cash cost of $97
an ounce.
Barrick Gold, Toronto, said it plans to buy back as many as 31
million shares, or 8.3%, of its shares outstanding, because it believes
they are undervalued.
In a recent meeting with analysts, Barrick said the buyback made more
sense than acquisitions. Barrick, which has perhaps the most aggressive
hedging program of any gold producer, locked in prices of more than $400
an ounce for about 10 million ounces of its future gold production,
helping insulate it from the fall in prices. Still, it took a
third-quarter charge of $385 million to close five mines in the U.S. and
Chile. At the same time, Barrick is spending $260 million to build its
Pierina mine in Peru, which it expects will produce 750,000 ounces of
gold a year at a cost of less than $100 an ounce, beginning next year.
One big company still on the prowl is Homestake. While some analysts
said the 86% premium it paid over Plutonic's closing price Friday was
too much, Jack E. Thompson, president and chief executive officer, said
the purchase will cut Homestake's cost of production to about $225 an
ounce next year from about $240. Mr. Thompson said Homestake continues
to court other companies, and might make other acquisitions next year.
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