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Northgate Takeover Proving Cheapest With Record Gold: Real M&A

Northgate Takeover Proving Cheapest With Record Gold
While bullion has climbed 26 percent in 2011, the Market Vectors Gold Miners exchange-traded fund tracking producers of the metal is little changed, data compiled by Bloomberg show. Photographer: Paul Taggart/Bloomberg

AuRico Gold Inc. is paying the cheapest valuation for a takeover of a North American gold producer in seven years even as bullion trades at a record.

The Halifax, Nova Scotia-based company that mines the precious metal in Mexico agreed yesterday to buy Northgate Minerals Corp. of Vancouver for C$1.28 billion ($1.31 billion) in stock to add production in Canada and Australia. Including net cash, AuRico’s acquisition valued Northgate at 14.7 times earnings before interest, taxes, depreciation and amortization, the lowest since 2004 for a North American deal worth more than $1 billion, according to data compiled by Bloomberg.

AuRico is paying about 64 percent less per dollar of earnings than Canadian rival Kinross Gold Corp. did for Red Back Mining Inc. a year ago, even after gold surged to a high of $1,913.50 an ounce last week. While bullion has climbed 26 percent in 2011, the Market Vectors Gold Miners exchange-traded fund tracking producers of the metal is little changed, data compiled by Bloomberg show. The gap in performance may spur more deals like AuRico’s purchase even if gold prices drop, according to Octavian Advisors LP and Caldwell Securities Ltd.

“This has moved into an extreme, and one of the things that should actually correct this in our view is M&A,” Richard Hurowitz, chief executive officer of New York-based Octavian, which oversees about $1 billion, said in a telephone interview. “If the market is going to trade gold stocks at a major discount, that’s a great opportunity for larger gold companies to buy up a smaller one because all of their potential targets are massively undervalued.”

Primero Deal Scrapped

Northgate’s shares climbed 28 percent to C$3.98 in Toronto yesterday, closing within 7 cents of AuRico’s offer. AuRico, formerly known as Gammon Gold Inc., retreated 19 percent to C$11.09, as merger arbitragers narrowed the spread between the companies’ share prices for the all-stock deal and the agreement derailed speculation that AuRico itself was a takeover target, according to Alfredo Scialabba, a special situations analyst at GFI Group Inc. in New York.

Investors in Northgate will get 0.365 shares of AuRico for each Northgate stock, AuRico said in a statement yesterday. As part of the deal, Northgate is scrapping its July accord to buy Primero Mining Corp. and will pay a C$25 million termination fee, Vancouver-based Primero said in a separate statement.

Relative Value

Northgate produces gold at mines in British Columbia and Victoria in Australia. Combining with AuRico will create a company with five operating gold mines, another that’s planned to start production next year and three projects that are in development. The combined company’s production will increase from about 475,000 so-called “gold equivalent” ounces this year to 730,000 ounces in 2013, AuRico said.

AuRico’s offer represents a 46 percent premium based on the companies’ trading average in the previous 20 days, according to data compiled by Bloomberg. That’s the highest for any gold mining deal since Goldcorp Inc. offered a 56 percent premium last September to buy Andean Resources Ltd., the data show.

The size of the premium offered by AuRico may have contributed to the drop in its shares, said Barry Allan, senior mining analyst at Mackie Research Capital Corp. in Toronto.

“Anytime you get a company that offers such a premium, you go long the company being taken over and short the company who makes the offer,” he said in a telephone interview.

Even with the premium, the deal values Northgate at 14.7 times its Ebitda of $89.6 million for the past 12 months. That would make it the cheapest takeover of a gold producer in North America since Vancouver-based Goldcorp offered to buy Wheaton River Minerals Ltd. for 8.7 times Ebitda in December 2004.


In last year’s biggest North American gold takeover, Toronto-based Kinross, Canada’s third-largest producer of the metal, paid 40.4 times Ebitda to acquire Red Back Mining of Vancouver in a $6.7 billion deal.

“The valuation is compelling,” said Sachin Shah, a merger arbitrage strategist at Tullett Prebon Plc in Jersey City, New Jersey. “If you’re betting on gold prices remaining at current levels, this deal is a winner for AuRico.”

Gold for immediate delivery closed at $1,788.43 yesterday, after touching a record of $1,913.50 on Aug. 23. While concern that the U.S. economic slowdown and Europe’s debt crisis will worsen has driven demand for gold as a haven asset, spurring a gain of as much as 35 percent, the Market Vectors ETF of gold miners has only advanced 0.8 percent in 2011.

‘Well and Truly’

Northgate had slipped 2.5 percent this year before yesterday’s deal. Toronto-based Barrick Gold Corp., the world’s largest producer of the metal, has slid 7.8 percent in 2011, while Kinross has retreated 10 percent in Toronto trading.

Shares of gold companies “have well and truly underperformed the gold price,” Richard Hall, Northgate’s chief executive officer, said in a telephone interview yesterday. Even the biggest producers “are coming down relative to what they were six to eight months ago,” he said.

Anne Day, spokeswoman for AuRico, didn’t respond to a phone message seeking comment on the deal’s valuation.

Bets by equity investors that bullion’s current rally is unsustainable may have weighed on gold stocks, according to Rick de los Reyes, a manager at T. Rowe Price Group Inc., which oversees about $510 billion.

Gold will retreat 16 percent from yesterday’s close to $1,510 an ounce next year, according to the average of analysts’ estimates compiled by Bloomberg. Bullion will decline another 8.9 percent to $1,376 in 2013, the projections show.

‘In a Bubble’

“Ultimately, people think gold can’t go up forever,” Baltimore-based de los Reyes said in a telephone interview. “As the price goes higher, you’re going to be less willing to price it in because you think it’s in a bubble.”

While Thomas Caldwell, chief executive officer of Toronto-based Caldwell Securities Ltd., says that bullion may have already peaked, the relative underperformance of gold stocks means that AuRico’s purchase may make sense even if the metal drops by $300 an ounce, he said.

“Bullion itself may have a pullback here and it could be pretty brutal,” Caldwell, whose firm oversees about C$1 billion, said in a telephone interview. “That does not necessarily mean that this is a bad deal. The stocks are not quite as vulnerable, and they have not built in these high prices. That’s why it makes more sense for companies to take over each other.”

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