1/06/99 - Gold mining giants eye expansion
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TORONTO, Jan 06, 1999 (The Canadian Press via COMTEX) -- After a year of playing it safe, Canada"s troubled gold sector has a new philosophy: bigger is better.
Senior gold producers have roared back to life with three major deals in recent weeks, aggressive plays that end many months of caution and cost-cutting.
On Nov. 30, Vancouver"s Placer Dome Inc., headed by John Willson, president and chief executive, snapped up a 50 per cent stake in a South African gold project for $235 million US.
Then on Dec. 9, in a bid to become the world"s lowest-cost gold producer, Peter Munk, chairman of Barrick Gold Corp., announced a $142-million all-cash takeover bid for Argentina Gold Corp. Analysts speculate Barrick may have to sweeten its offer to succeed.
Argentina management is scrambling to find a rival bidder and has signed confidentiality agreements with three Barrick rivals, including Newmont Mining Corp. of Denver.
Not to be outdone, Placer grabbed the front page again Dec. 14 with a $1.1-billion US all-stock takeover bid for Getchell Gold Corp. of Denver.
Barrick and Placer have signalled their deal-making days are far from over. Meanwhile, many of Canada"s mid-tier gold producers, anxious not to be left out in the cold, are on the make, analysts say.
""There"s much more (consolidation) to be done,"" said David Davidson, an analyst at Newcrest Capital Inc. in Toronto.
""If equity markets are not there to raise money and expand, the next alternative is merging together to create synergies. Strong, solid companies will see this as a buying opportunity.""
Since February 1996, gold has lost about 30 per cent of its value and continues to hover below $300 US an ounce. The plunge paralysed gold companies. Most producers bit the bullet and decreased the value of assets on their balance sheets to $325 US an ounce.
Despite dire predictions, only one major producer, Pegasus Gold Corp. of Spokane, Wash., filed for bankruptcy protection in January.
Fear that prices could tumble further forced many to cut production costs, shelve mines and put deals on hold. If moves were made, they were largely housekeeping measures.
For example, Homestake Mining Co. of San Francisco launched a $440-million Cdn share-exchange bid last summer for the 49.4 per cent of Vancouver"s Prime Resources Group Inc. the company didn"t already own.
There were only two significant deals: Newmont snapped up Santa Fe Pacific Gold Corp. last May for $2.1 billion US while Toronto"s Kinross Gold Corp. merged with Amax Gold Inc. of Denver in February.
""Everybody spent all of 1998 saying we"re going to be very cautious. Nothing happened,"" said Victor Flores, analyst at HSBC Securities in Toronto.
The moribund market got a jolt from Placer"s Africa deal and then Barrick"s move to buy Argentina Gold. But analysts credit Placer"s willingness to pay more than a 100 per cent premium for Getchell Gold as the breath of life.
The high evaluation surprised many because Getchell and its Nevada properties have been on the auction block for more than a year. The deal signals a shift from belt-tightening to free-spending expansion.
""Placer Dome has raised the bar,"" said Flores. ""Everybody is looking to grow.""
The sentiment that size matters makes the folks at Barrick and Placer Dome bristle. Despite similar blueprints for growth, the two producers are not-so-subtly critical of one another"s acquisition strategy and insist they alone are on the right track.
""We"re not interested in bulking up gold reserves at any costs,"" said Vince Borg, Barrick spokesman. ""You don"t necessarily have to go helter skelter on a shopping spree for the sake of it.""
All of Barrick"s potential acquisitions must pass a strict cash flow and earnings test. The takeover of Argentina Gold, for example, makes ""logical sense"" due to the proximity of the Vancouver junior"s promising Veladero project to Barrick"s Pascua property in neighbouring Chile, Borg said.
Placer, meanwhile, says it"s well-prepared to manage costly challenges ahead. In addition to investing more than $1.3 billion US in cash and stock in South Africa and Nevada, the company will sink $575 million US into developing a Venezuela gold property over the next two years. More deals are likely.
""We see further consolidation and we will stay in the game,"" said Hugh Leggatt, company spokesman. Unlike its rivals, Placer plans to cut friendly agreements behind the scenes.
But the company"s courtships has generated concern. Fears that Placer may be stretching itself too thin have pushed shares down 15 per cent in recent trading.
Meanwhile, there"s much speculation as to what may be next for mid-tier producers that have survived the poor gold market with a strong balance sheet and assets intact.
There"s mounting pressure for firms with annual production of about one million ounces of gold or less to join forces or acquire their rivals, industry watchers say. And many plan to heed the call.
Copyright (c) 1998 The Canadian Press (CP), All rights reserved.
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By Keith Damsell |
