SWITZERLAND (ResourceInvestor.com) -- Barrick's hostile takeover bid for NovaGold has been officially published. Barrick is offering NovaGold [AMEX:NG; TSX:NG] shareholders to tender their shares to Barrick [NYSE:ABX; TSX:ABX] at US$14.50 per share with a closing date of 15th September.
However NovaGold’s shares are trading currently at US$16.89 per share on Amex, and C$19.13 in Toronto (at Friday’s close). The premium of 16.4% to the price bid, suggests that the market does not expect the hostile take over to succeed at the offered level.
NovaGold advised its shareholders to take no action regarding barrick gold unsolicited takeover bid in a company press release - with a special committee of NG board of directors to review and provide recommendation. Barrick management values the company at roughly $35 per ounce of gold resources without offering additional value to copper holdings, according to NovaGold.
NovaGold stated that, "Recent takeover valuations in the gold sector have been at significantly higher per ounce multiples than those implied by the Barrick offer."
There are several possible scenarios for this share price premium to the bid offer, which the author will attempt to outline here, although many other interpretations are of course possible.
This hostile bid is already predestined to find its place in mining history, but as of today no one knows whether David will escape the clutches of Goliath, or whether Goliath has opened Pandora’s box in launching a bid that Rick van Nieuwenhuyse described as "opportunistic," and that several outraged NovaGold shareholders are using slightly more derogatory terms for on theYahoo and Stockhouse bulletin boards.
What are some of the main issues involved in this hostile bid?
Fair Value for the Assets of NovaGold
The ABX bid price of $14.50 per share represents only 2% of gross value in the above table.
A fair bid at 10% of gross value of all metals in situ would be equal to US$73 per share for NovaGold. (See paragraph 7 below for full discussion of this topic.)
The Shareholders Rights Plan (SRP) - Otherwise Known as a Poison Pill
The SRP announced by NovaGold on April 19 th has at face value potentially been triggered by NovaGold’s requirement of 60 days to study a hostile offer compared to Barrick’s offer today closing in less than 60 days on September 15th.
Barrick’s offer is conditional on NovaGold withdrawing the SRP, or it being found in court to be illegal. One logical interpretation of these moves on the takeover chess board might be that ABX expects to obtain a court ruling declaring the SRP illegal, otherwise why should they risk triggering it and withdrawing their bid.
From NovaGold’s point of view the SRP will produce exactly what they need; more time to prepare a measured response to the hostile bid. If Barrick went to court to void the SRP, this would be time consuming and provide more time for NovaGold to find a shining white knight in silver, gold, (or even bronze) armour and a much better deal for their shareholders? Other scenarios are equally plausible here, even including a spirited defence by NovaGold which allowed them to remain as an independent junior. NovaGold’s management is highly regarded in the industry, and are now being put to the test to find the best possible outcome for all NovaGold employees and shareholders.
Donlin Creek - Who Owns What?
NovaGold owns 70%, but Barrick has the right to earn a backin from 30% to 70% by meeting certain conditions, including announcing a decision on mine construction by November 2007. NovaGold claim Barrick will not be able to meet this deadline, and could miss it by a period of 1 to 2 years in their SEC filing this week.
Barrick claimed they are on track, excluding "factors out of their control" in their conference call on August 3, 2006. At stake is a valuation difference of 40% of 28.4 million ounces = 11.4 million ounces, which if valued at US$100/oz equals $1.14 billion.
This must be judged against a backdrop of a current market cap for NovaGold of 104 million Fully Diluted x US$16.89 = $1.756 billion.
These figures ignore any updated resource figures from not yet calculated or published drilling results, and can therefore be considered conservative bearing in mind the extensive drill program.
ABX’s Hedge Book
As reported below, Barrick is still suffering from its hedge book and may wish to find ways to reduce it further if the gold price stays at current levels or rises to new highs, as seems quite likely with the current world geopolitical and economic background. Their bid for NovaGold could well be driven by the need to find ounces for the future to deliver into their forward gold sales to prevent further losses. Where else can they find it? Very few juniors or mid caps have anywhere near the NovaGold project resource figures.
"During the second quarter, Barrick eliminated the remainder of the Placer Dome hedgebook, in turn reducing its corporate gold sales by 7.7 million ounces year-to-date at $1.8 billion, of which $300 million remains to be paid. The corporate gold sales contract now stands at 2.8 million ounces with a goal of eliminating this position no later than the end of 2009. Meanwhile, Barrick is not reducing its 9.5 million ounces of project gold sales contracts, explaining that these contracts will support return of capital, and project financing activities to diminish mining project risk."
NovaGold’s Gold Is in Focus, but Its Copper Assets Are Even More Gilt Edged!
From the table in para 1 above one can see that the copper at Galore Creek represents 60% of the valuation of NovaGold’s metal in the ground assets at current market prices. This is not being fully refelected in Barrick’s circular, which is focused mainly on gold. Perhaps Barrick would be embarassed if investors focused too much on the other metals, and particularly the copper. It might just cause a copper or base metal major to put in a counter bid?
White Knight Required or Perhaps a Bronze Knight Will Do?
The market has been waiting for Barrick’s official offer delivered today, and NovaGold’s response due in the next few days or week or so. No doubt many other gold, copper and base metal majors will be studying these documents, putting figures into their spread sheets, and coming to the same conclusions as Barrick, the writer, and many posters on the NovaGold Bulletin Boards.
NovaGold is a steal at this Barrick bid offer of US$14.50/ share. How many other companies will consider bidding? Will a friendly suitor be found? Will Barrick raise its bid to a level to achieve a successful take over, or will NovaGold fight off the bid and remain independent and become a producer as they always intended?
Enterprise Value/Ounce of Total Gold Resource
Valuations
There are many ways to value juniors, including the following. The late Julian Baring, used a simple rule of thumb for valuing metal shares.
"Buy up to 10% of the in situ value of a deposit using current metal prices, hold up to 40% and sell above 40% taking no prisoners!!!!"
ABX’s bid is equivalent to only 2% of the gross value of NovaGold’s metal resources, listed in the tables above.
According to Canaccord, the average trading price of 44 Canadian junior is US$64.00 per in situ ounce. That is roughly 10% of the current US$640 price of gold. (Note the 10% rule). Furthermore, the valuations peaked at US$72.50 when gold hit US$725 in May.
RBC just published a piece using 37 juniors, excluding NovaGold, that could either become the next ABX or be taken over, that are trading at US$95 per ounce.
Barrick should thus on a historical comparison basis be prepared to pay 10% or more of the in situ value of NovaGold's assets
A fair bid at 10% of gross value of all metals in situ would be equal to US$73 per share for NovaGold.
Perhaps companies such as PD, Teck, Newmont, RTZ, Xstrata, BHP, Anglo, Goldcorp, Goldfields and others may be tempted to step in and make a counter bid, when they realise the discrepancy between NovaGold’s value and the low ball offer made by Barrick?
NovaGold needs urgently to update their calculations using actual metal prices and not historical conservative figures of $400 /oz for gold and $1.00/lb for copper, which they have used in some of their published filings over the last few years.
At todays values of $646/oz for gold and $3.63/lb for copper (September futures at the bid close), one can easily imagine a cash flow from Galore Creek of US$1.5 billion on production startup in ca 2012.
This cash flow is greater than ABX’s total bid value, and ignores the value of Donlin and all the other assets, and fails to put a suitable multiple to cash flow in order to calculate value.
NovaGold also included this table in their SEC filing already mentioned above.
Precedent Transaction Analysis
Summary
At this early stage no one knows the anwser, but whatever scenario unfolds, the market is already saying that NovaGold is worth more than the "opportunistic" hostile bid by Barrick.
If Barrick’s bid for 50.1% of NovaGold were to be successful, it would mean that they gain control over $76 billion worth of metal in situ for an outlay nett of NovaGold’s cash and securities assets of approximately $435 million, (or 0.6% outlay of the gross value). This would be a fantastic achievement for Barrick and could well be described as the deal of the century or even millenium! Of course consolidating the remainder of the company would cost more but the job would have been done at the target level.
Using the 10% of metals in situ method of valuation above we arrive at a fair value of $73 versus $14.50 bid by Barrick. Perhaps the market will accept a figure somewhere between the two, so we now await to see if Barrick raises their bid or if someone else comes to the party and joins the bidding with a higher offer, or if NovaGold can fight off the bid and remain independent.
The latter is the preferred outcome for many NovaGold shareholders, because of the share price potential of NovaGold over the next few years, but the sharks have smelt the blood in the water, and are circling the unfortunate victim, and it would indeed take a brilliant effort on the part of management to survive as an independent company.
Disclosure: The author has been a shareholder of NG for several years.
