Newcrest Agrees to $8.8 Billion Deal for Lihir Gold

Newcrest Mining Ltd. agreed to buy Lihir Gold Ltd. after sweetening its cash and stock bid to A$9.2 billion ($8.5 billion) to create the world’s fifth-biggest producer of the metal.

The bid values Port Moresby, Papua New Guinea-based Lihir’s shares at A$3.86 each, based on today’s closing price. Newcrest, based in Melbourne, raised the proportion of shares its paying for Lihir to 8.43 from 9 last month, the companies said today in a joint statement.

Buying Lihir will give Newcrest Chief Executive Officer Ian Smith mines in Papua New Guinea, Australia and Africa and boost sales by more than half. Gold has risen for six quarters, marking its longest rally since 1979 as investors purchased the metal as an alternative to holding currency.

“The merged entity will be a very large company by Australian standards and a very large gold company globally,” said Prasad Patkar, who helps manage A$1.9 billion and holds Lihir shares at Platypus Asset Management Ltd. in Sydney. “Unequivocally it’s a good deal.”

Newcrest, Australia’s biggest gold company, closed down 4.3 percent on the Australian stock exchange at A$30.69, amid concern a new tax will cut earnings. Lihir rose 3.3 percent to A$3.79. Lihir has gained 25 percent since the day before Newcrest’s takeover offer was announced. Lihir rejected the April 1 offer, saying it was inadequate.

Photographer: Carla Gottgens/Bloomberg

Ian Smith, chief executive officer of Newcrest Mining Ltd., poses for a photograph at the company headquarters in Melbourne, in February. Close

Ian Smith, chief executive officer of Newcrest Mining Ltd., poses for a photograph at... Read More

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Photographer: Carla Gottgens/Bloomberg

Ian Smith, chief executive officer of Newcrest Mining Ltd., poses for a photograph at the company headquarters in Melbourne, in February.

The deal has helped the combined value of takeovers announced this year in Australia in the energy and mining industries reach about $27 billion, according to Bloomberg data. That’s the busiest start since the same period in 2008.

Hold Talks

Lihir, the second-largest gold mining company on the exchange, can continue to hold talks with other potential suitors until June 8, the companies said. Lihir appointed Macquarie Capital Advisers and Greenhill Caliburn to help study alternatives to the Newcrest offer, the company said April 23.

Talks with other groups are “at various stages” and the company is providing information on its finances to “all of them,” Lihir Chairman Ross Garnaut said during a conference call with reporters. He declined to name the groups.

Newcrest is advised by Lazard Ltd. and Merrill Lynch, a Bank of America Corp. unit.

“The increase in the offer as well as the ability to continue to see if another interested party arises certainly addresses the issue the board was concerned about when Newcrest proposed an inferior offer before Easter,” Lihir CEO Graeme Hunt said in an interview with Bloomberg TV.

Other Bidders?

Newmont Mining Corp. may have held talks with Lihir, the Australian Financial Review reported April 19, without saying where it got the information. Newmont and Barrick Gold Corp. might be potential bidders, the report said.

“The combined entity would be on the radar for other major gold miners,” Platypus’s Patkar said today. “It’s only a matter of time.”

Newmont, the largest U.S. gold producer, and BHP Billiton Ltd. are among mining companies that may make takeovers this year as higher metal prices buoy finances, Citigroup Inc. said last month. Global mining companies may have $91.3 billion of surplus cash, after paying dividends and capital expenditure, by 2012, according to the broker.

Barrick, the world’s largest gold producer, is targeting output of between 7.6 million ounces and 8 million ounces this year, it said Feb. 19.

‘Super Tax’

Lihir has hired an independent expert to report on the bid and consider the possible effect of the proposed “super tax” on mining companies in Australia. Treasurer Wayne Swan said May 2 that the government plans to impose a 40 percent tax on resource profits starting in 2012. The proposal may cut Citigroup Inc.’s valuation of Newcrest by 20 percent, the broker said after the tax was announced.

The effect on Newcrest will be limited, CEO Smith said. “The worst case scenario, it has an overall net present value effect on us of about 5 percent,” he said, adding that the tax will likely be watered down before being passed into law.

Newcrest will cut its reliance on earnings from Australia to 52 percent from 75 percent under the proposed deal. Lihir, which has more than 97 percent of its production outside Australia, will be unaffected by the new tax, Goldman Sachs JBWere Pty said yesterday in a report.

Newcrest’s Smith last year outlined a five-year plan to boost output 40 percent from its mines in Indonesia and Australia. It approved last month the A$1.91 billion expansion of its Cadia Valley operation in New South Wales and said the company’s full-year production may be at the lower end of its 1.81 million to 1.91 million ounce forecast.

Cost Savings

The combined group would have sales of A$3.9 billion and production of 2.8 million ounces a year, it said, based on 2009 figures. It also would have the world’s fourth-biggest gold equivalent reserves. Output will rise to 3.75 million ounces by 2014, it said.

The takeover aims to deliver pretax cost savings of A$85 million a year, Newcrest said.

Newcrest is offering to pay 19 times earnings before interest, tax, depreciation and amortization, compared with the median multiple of 24 times for 10 gold mining industry deals complied by Bloomberg data. Lihir is trading at 25 times future earnings, compared with 24 times for Newcrest.

New CEO

Lihir last month named Hunt, a former senior executive at BHP as CEO, replacing Arthur Hood who resigned in January after his contract wasn’t renewed. Hood led the acquisition of Ballarat Goldfields NL in 2006, which resulted in the company booking $413 million of one-time charges. The Ballarat mine was sold in March for A$4.5 million.

Gold for immediate delivery traded at $1,178.63 an ounce at 5:50 p.m. Sydney time, near a five-month high, as sovereign debt risks in Europe and volatile currencies led investors to the safety of bullion.

Newcrest is offering one of its shares for every 8.43 Lihir shares plus 22.5 cents, less any first-half dividend, the companies said in the statement. That compares with the earlier offer of one Newcrest share for every 9 Lihir shares held plus 22.5 cents. It had made an initial proposal of one of its shares for every 9.5 Lihir shares on Feb. 15, Lihir said April 1.

Lihir is targeting a 40 percent gain in average output to 1.45 million ounces from 2012 to 2016. Last year it produced 1.124 million ounces from its mines in Australia, Papua New Guinea and the Ivory Coast in West Africa. Its biggest asset is the Lihir mine in Papua New Guinea, the world’s fourth-biggest by reserves, according to Southern Cross Equities Ltd.

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net; Elisabeth Behrmann in Sydney at ebehrmann1@bloomberg.net

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