St. LOUIS () -- Lihir Gold Ltd. [Nasdaq:LIHR; ASX:LGL] his made an all-stock bid for Equigold NL [ASX:EQI] valued at A$1 billion ($913 million), creating the world's ninth largest gold producer with production of more than 1.2 million ounces of gold annually, beginning next year. Lihir shareholders sold on the news, but analysts were quick to endorse the deal.
In a research note on Thursday, RBC Capital Markets analyst Geoff Breen called the plan "an attractive acquisition for Lihir," that should immediately contribute to Lihir's earnings. Equigold has a "very clean balance sheet" and 11 years of continuous profits as well as a 60% dividend payout, he said.
Jonathan Battershill of Citi Investment Research upgraded Lihir stock to "Buy" from "Hold" in a client note. He said the acquisition "provides the geographical and operational diversification that (Lihir) has been striving for." He also said the combined company would have "some enviable exploration acreage in West Africa."
The proposal calls for Equigold shareholders to get 33 Lihir shares for every 25 shares of Equigold. At yesterday's closing price, the offer values Equigold shares at approximately A$5.33, representing a premium of 24%.
However, shares of Lihir fell $1.73, or 5.2%, to $31.68 in midday trading on the news, while Equigold share rose 33 cents, or 7.7%, to close at A$4.63. The all-stock offer now values Equigold closer to A$4.75 a share, 11% more than yesterday's closing price.
Lihir is paying about $560 an ounce for 1.9 million ounces of reserves and will boost the company's total reserves by almost 10% with new assets in Africa and Australia.
Equigold owns an 85% stake in the A$98 million Bonikro mine in the Ivory Coast, due to start output in July at an initial rate of about 120,000 ounces a year, increasing to 140-150,000 ounces in 2009. The company's Mt. Rawdon mine in Australia is estimated to produce about 110,000 ounces in the 2008 fiscal year and about 100,000 ounces in the next 10 years.
Lihir's Ballarat mine in Australia, the world's fifth-largest gold deposit, is scheduled to begin commercial production in the fourth quarter of the current year, and the mine is expected to produce around 200,000 ounces per year for more than 20 years.
At Lihir Island in Papua New Guinea, production is forecast to be at record levels of between 700,000-770,000 ounces this year, increasing to approximately 1 million ounces by 2011. Last month, the company approved a $696 million expansion at the Lihir mine to boost annual output by 43%.
Lihir Island and Ballarat production is estimated to be at a total cash cost of less than $350/oz long term, while Equigold production at approximately $330/oz for the long term from 2009.
"The merger will bring together the established operations at Lihir Island and Mt. Rawdon. Bonikro will be in production within the next few months, followed by Ballarat by year end," said Lihir Gold CEO Arthur Hood in a statement. "The vast exploration potential in Ivory Coast will add major growth opportunities in the future."
Equigold Chairman Nick Giorgetta said the merger was a logical step for Equigold as it moved to the next stage of its development.
"This is an excellent deal for our shareholders," he said. "It secures the future of the organisation, delivers a substantial merger premium, and provides an opportunity to participate in the growth and prosperity of the merged group. Furthermore, it gives us the financial muscle required to realise the full potential of our exploration tenements in Ivory Coast."
The merger is subject to approval by Equigold shareholders, with the meeting to approve the proposal to be held during May 2008. The transaction is expected to be completed by early June 2008. Each party has agreed to pay a break fee to the other party equal to $11.3 million in certain circumstances.
