AuRico Gold Inc. has struck a friendly deal to take over Northgate Minerals Corp. for $1.46-billion as part of its strategy to expand production in times of record-breaking gold prices.
The all-stock deal, which some investors described as rich, breaks up a previous agreement Northgate made in July to buy Primero Mining Corp. for $370 million and vaults AuRico to intermediate gold producer status alongside such peers as Osisko Mining Corp. and New Gold Inc.
The transaction sees Mexican-focused AuRico, known until recently as Gammon Gold Inc., pick up new mines in Canada and Australia to help it increase production by more than 50 per cent to 730,000 ounces by 2013.
The new company will have five operating gold mines with a sixth starting production next year, generating operating cash flow of nearly $1-billion, AuRico president and chief executive Rene Marion said in an interview Monday.
"We're really just a cash-generating machine after that," said Mr. Marion, who will be CEO of the new company.
The deal was announced Monday as gold prices settled around $1,790 an ounce, below a record of above $1,900 reached earlier this month.
It's the latest in a series of gold industry acquisitions that are expected to continue as producers seek out growth amid expectations the gold price will resume rising.
More investors are turning to gold as a safe investment when compared to currencies such as the greenback and euro as the United States and Europe try to resolve their mounting debt issues.
Northgate president and CEO Richard Hall said the AuRico deal will give shareholders a significant premium and the chance to be part of a bigger, stronger gold producer.
Mr. Hall, who was appointed Northgate's CEO just seven weeks ago, said the company's advisers recommended the AuRico offer over a transaction with Primero.
"It's a very good platform going forward," said Mr. Hall, who will leave the company if the deal is approved at a shareholder vote expected in October.
Under the agreement, AuRico will pay 0.365 of a common share for each Northgate common share, valuing Northgate at $5.01 a share based on AuRico's Friday closing price of $13.72 on the Toronto Stock Exchange, or a 60 per cent premium to Northgate's closing price of $3.10.
On Monday, AuRico shares fell about 20 per cent to $11.05, valuing the deal at about $1.18-billion or $4.03 per Northgate share. Northgate shares closed up 27 per cent to $3.93 on Monday.
"We expect the market will view this transaction negatively," Desjardins Securities analyst Brian Christie wrote in a note Monday, saying the market believes AuRico is "overpaying" for Northgate's flagship Young-Davidson asset being built in northern Ontario.
"However, we note that AuRico has a strong track record of turning around and/or optimizing various mining assets," Mr. Christie said.
Northgate also owns the Kemess mine in B.C. and the Fosterville and Stawell mines in Australia.
The deal comes four months after AuRico bought Capital Gold Corp. for $420 million.
AuRico did not attempt to buy the proposed combination of Northgate and Primero, said Primero CEO Joseph Conway, who was slated to be CEO of the merged entity.
Primero will receive a $25 million break fee from Northgate, and Mr. Conway said his company will once again consider other potential opportunities, while continuing to run its San Dimas gold-silver mine in Mexico.
"We don't feel that we now … are out of opportunities that we can't grow the business and add good value for shareholders," said Mr. Conway, the former CEO of Iamgold Corp. who took the top job at Primero in June 2010 after it bought San Dimas from Goldcorp Inc.