Centerra to Buy Debt-Choked Thompson Creek for $1.1 Billion

  • Stock-swap component of transaction worth about $135 million
  • Royal Gold’s streaming stake on Mount Milligan to be amended

Centerra Gold Inc. agreed to acquire Thompson Creek Metals Co. in a deal valued at $1.1 billion as the Toronto-based miner looks to expand in North America and reduce its dependence on Central Asia.

Each Thompson Creek share will be exchanged at 0.0988 a Centerra share, the companies said Tuesday in a statement. The ratio represents a 32 percent premium on closing prices Monday and values the exchange at about C$176 million ($135 million). Centerra will also redeem Thompson Creek’s $889 million in bonds plus interest, and take on $47 million in capital lease obligations.

The transaction will give Centerra, which gets most of its revenue from a mine in the Kyrgyz Republic, control of the Mount Milligan copper and gold mine in central British Columbia. Thompson Creek shares have dropped about 95 percent in the past five years as its molybdenum mines were pummeled by tumbling prices of the metal that’s used to harden oil drills, and as it increased debt to build Mount Milligan.

‘Low-Cost’

“Together with Centerra’s low-cost, long-lived Kumtor Mine in the Kyrgyz Republic, the combined company is expected to be firmly established as a low-cost gold producer with a geographically diversified footprint and industry-leading margins,” the companies said.

With bullion off to its biggest rally to start a year in four decades -- aided by the U.K.’s vote to quit the EU -- mine buyers are paying higher premiums and the pace of deals is accelerating, data compiled by Bloomberg show.

The value of gold reserves held by major producers has almost doubled since the third quarter of last year, according to Bloomberg Intelligence.

Thompson Creek shares rose 13 percent to 72 Canadian cents in Toronto at 9:32 a.m., giving the Littleton, Colorado-based company a market value of C$160 million. Centerra dropped 7.4 percent to C$7.50.

The redemption of notes will be financed through a combination of a $170 million equity offering, new credit and cash.

Political Risk

Centerra has been embroiled with the Kyrgyz government over developing and running its Kumtor mine. On June 27, Centerra said it had secured all necessary permits and approvals to run Kumtor through the rest of the year.

Centerra has traded at significantly lower valuation multiples to its peers because of concerns the Kyrgyz government will restructure the mine ownership agreement, TD Securities analyst Greg Barnes wrote in a research note published Wednesday. This deal helps diversify the company’s political risk.

The acquisition “should help to alleviate the valuation discount, but not eliminate it, in our view,” he wrote, adding that the transaction will dilute the Kyrgyz government’s equity interest to 27 percent. “We see the possibility that this transaction could raise some concerns in Kyrgyzstan.”

Streaming Deal

Royal Gold Inc. has a 52.25 percent gold streaming interest on Mount Milligan. That will be amended to a 35 percent gold stream and 18.75 percent copper stream. The transfer payment on the gold stream will be unchanged while the copper transfer payment will be equal to 15 percent of the prevailing market price of copper, the companies said.

In a separate statement, Royal Gold said it supports the transaction. “To broaden interest and maximize value, we demonstrated some flexibility in amending our gold stream to generate interest from gold companies,” Chief Executive Officer Tony Jensen said.

In addition to Mount Milligan, Thompson Creek also has two molybdenum mines in British Columbia and Idaho that are on care and maintenance and a molybdenum conversion plant in Pennsylvania. It also has two development properties in B.C.

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