New Gold Inc., a producer of the metal in North America and Australia, agreed to buy Rainy River Resources Ltd. in a cash-and-stock deal currently valued at C$367.7 million ($354.6 million) to add a 4 million-ounce reserve in Ontario.
Investors in Toronto-based Rainy River will get half of a New Gold share or C$3.83 in cash, the companies said today in a joint statement. The maximum cash consideration will be about C$198 million and New Gold won’t issue more than 25.8 million shares.
With a 50-50 split of cash and stock, the offer values Rainy River at C$3.68 a share, based on today’s closing prices. The cash offer was 69 percent more than the 20-day average price of the stock prior to today’s announcement, according to data compiled by Bloomberg.
The market may view the transaction negatively, Steven Green, a Toronto-based analyst at TD Securities Inc., said in a note today.
“While we believe the time is right for producers with strong balance sheets to be buying assets, given the early stage of this project (still in permitting), relatively low grades, and significant funding required (initial capex just under $1 billion), we’re not of the view that this is the right fit,” Green said.
The project also has a similar timeline to New Gold’s Blackwater project, which could put pressure on the company’s balance sheet if it builds both mines at the same time, he said.
New Gold fell 8.7 percent to C$7.05 at the close in Toronto, while Rainy River rose 35 percent to C$3.65.
The Rainy River gold project is located about 65 kilometers (40 miles) northwest of Fort Frances in northwestern Ontario. Vancouver-based New Gold operates gold mines in British Columbia, California, Mexico and New South Wales.
RBC Capital Markets is New Gold’s financial adviser while its legal advisers are Cassels Brock & Blackwell LLP in Canada and Paul, Weiss, Rifkind, Wharton & Garrison LLP in the U.S.
Rainy River’s financial adviser is BMO Capital Markets and its legal advisers are Bull, Housser & Tupper LLP and Davies Ward Phillips & Vineberg LLP. CIBC World Markets provided a fairness opinion to a special committee of Rainy River directors.