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Alacer Offer at 40% Premium Seen Tied to Turkey: Real M&A

Alacer Gold Corp. CEO David Quinlivan
Alacer, which has suspended two open pit mines and cut 108 jobs to lower costs, would consider selling the mines, CEO David Quinlivan said on a Nov. 15 conference call. Photographer: Sergio Dionisio/Bloomberg

Alacer Gold Corp.’s plunging mining profits in Australia are creating a takeover bargain in Turkey.

Alacer has fallen 64 percent in Toronto trading in the last year as it struggles with rising costs and deteriorating ore quality at its Australian mines. The drop has left the Englewood, Colorado-based company trading at 0.8 times its net assets, a bigger discount than any North American precious metals producer with a market value of more than $1 billion, according to data compiled by Bloomberg.

Evans & Partners Pty said bearish investors are overlooking the potential for expansion at Alacer’s Copler gold mine in Turkey, which could prompt a buyer to pay 40 percent more than the company’s market value in a takeover, or about C$1.73 billion ($1.74 billion). Such a deal would be a bargain relative to the C$1.96 billion that National Bank Financial says Copler alone is worth. Eldorado Gold Corp., owner of Turkey’s largest gold mine, is among potential suitors, said Mine Life Pty.

“The Aussie operations are a drag, but the market isn’t being rational,” Gavin Wendt, senior resources analyst at Mine Life, a Sydney-based equity researcher, said in a telephone interview. “I am sure there would be companies running the rule over Alacer. Potential bidders are almost endless.”

Roger Howe, a spokesman for Alacer, which also has shares that trade in Sydney, had no comment on the possibility of a takeover.

Australian Trouble

Alacer was created in February 2011 through the merger of Englewood, Colorado-based Anatolia Minerals Development Ltd., which owned the Copler mine, and Perth, Australia-based Avoca Resources Ltd. The deal combined the Turkish mine, which hadn’t started production, with three mines in Australia.

The company reported net income of $97.8 million for its first two full quarters of operations as a new company, through September 2011. A year later, profits are down by nearly half amid rising costs, a stronger Australian dollar, and lower quality ore at its Australian mines.

Alacer’s Australian operations fell to a loss of $23.5 million in the first nine months of 2012, while the Turkish business reported a profit of $149.7 million.

The company has increased its estimates for the Copler project, of which 80 percent is owned by Alacer and 20 percent by Turkish partner Lidya Madencilik A.S. Alacer is conducting a study that could boost estimates of Copler’s resources 27 percent to more than 10 million ounces. The results are due in the first quarter of 2013.

Turkish Potential

“Certainly it could make a good M&A target,” Cathy Moises, a Melbourne-based analyst at Evans & Partners, said in a phone interview. “The Turkey project would make a world-class asset.”

With a market value of C$1.24 billion yesterday, the company was trading at a 20 percent discount to its book value, cheaper than all of the 36 other North American precious metals explorers with market capitalizations of more than $1 billion, data compiled by Bloomberg show.

Today, Alacer shares rose 3.3 percent to C$4.45 in Toronto, the biggest gain since Sept. 28. The stock also posted the steepest increase in the FTSE Gold Mines Index of 25 companies worldwide focused primarily on mining for gold.

“The Turkish asset could comfortably sit inside a much larger company,” Troy Irvin, an analyst at Argonaut Securities Pty, said in a phone interview from Perth. “It’s a top-quality asset.”

The Copler mine has a net asset value of C$1.96 billion, according to Paolo Lostritto, an analyst at National Bank of Canada in Toronto.

Rising Gold

Including the Australian mines and exploration properties, and factoring in taxes and corporate costs, Alacer’s total net asset value is C$2.1 billion, or C$7.18 a share, based on Lostritto’s analysis, published in a Nov. 14 research note. Alacer shares ended yesterday at C$4.31 in Toronto, the lowest since the February 2011 merger.

That “base-case” scenario assumes a long-term gold price of $1,400 an ounce, the note shows. Gold, which yesterday traded at $1,697.90 an ounce, is forecast by analysts to fetch a median of $1,850 next year, according to the median of 19 estimates compiled by Bloomberg.

“The outlook for gold is very, very strong,” said Wendt, the analyst at Mine Life. “Potential bidders will have confidence in the future of gold and that will provide them with the comfort level to look at acquisitions.”

Eldorado, the Vancouver-based owner of Turkey’s Kisladag mine that’s the biggest gold mine in Europe, is the most likely Canadian acquirer for Alacer, he said. Eldorado this year bought European Goldfields Ltd. for C$2.34 billion.

AngloGold Ashanti

Other than Eldorado, potential bidders also include AngloGold Ashanti Ltd., the Johannesburg-based company that has been hurt at home by strikes, Wendt said.

AngloGold, the third-largest producer of the metal, is “talking to people” about potential acquisitions as stock price declines provide opportunities, Chief Executive Officer Mark Cutifani said Aug. 8. AngloGold would look at smaller mines with large growth potential, he said.

Alan Fine, a spokesman for AngloGold, said the company doesn’t comment on speculation. Nancy Woo, a spokeswoman for Eldorado in Vancouver, also declined to comment.

Chinese companies may also be interested, according to Argonaut’s Irvin. Shandong Gold Group Co., Zijin Mining Group Co. and China National Gold Group Corp. -- China’s biggest gold companies -- are looking for overseas acquisitions, executives at all three said last month.

Australian Issues

“There isn’t much untapped high-quality gold resource in China,” said Benjamin Pei, a Beijing-based analyst with Bocom International Holdings Co., the investment banking unit of Bank of Communications Co. “Big producers are actively looking for overseas assets to underpin their production and profits.”

A spokesman for Shandong couldn’t be reached, while an official at China National Gold declined to comment on potential interest in Alacer.

“We haven’t looked at Turkey, and so far no one has approached us,” said Lan Fusheng, vice chairman of Zijin Mining. Lan wouldn’t rule out the possibility that the company would study a bid for Alacer.

Any buyer would need to have a plan for the Australian business, which may hold some bidders back, said Leily Omoumi, a Toronto-based analyst at Bank of Nova Scotia.

“I do think it could be an acquisition target, I just don’t know who would want to take on the issues with Australia at this point,” Omoumi said in a phone interview. “The sooner they resolve this situation the better it is for the company.”

Luring Bidders

Alacer, which has suspended two open pit mines and cut 108 jobs to lower costs, would consider selling the mines, CEO David Quinlivan said on a Nov. 15 conference call. It hasn’t received any offers yet, he said.

Still, the potential scale of the Turkish mine may be enough to lure bidders for the whole company, Jo Battershill, a Sydney-based analyst at UBS AG, wrote in a Nov. 15 research note.

“The project could fit into the portfolio of the world’s largest gold companies,” Battershill wrote. “In such a circumstance, we believe the Australian assets would potentially be simply divested.”

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