Russian miner Nord Gold, the country's third-largest gold producer, will bid for the 25 per cent of High River Gold Mines it does not already own, in a deal valuing the Canadian-listed producer at $1.2-billion.
Nord Gold, controlled by billionaire Alexei Mordashov, was spun off from Mordashov-owned Severstal earlier this year and listed its global depositary receipts (GDRs) in London as part of its efforts to pursue an ambitious expansion strategy.
Although major Russian gold miners are more accustomed to exploring and developing resources closer to home, Nord Gold, a relative newcomer, has bet heavily on Africa, with assets in Guinea and Burkina Faso.
Successfully buying out minority shareholders in High River will give Nord Gold full control of the producer. The miner first bought a stake in 2008 and the company has since become a cornerstone of the group's production and resources, including its Taparko mine and Bissa project in Burkina Faso.
The deal could also prove a key step towards achieving the 25-per-cent free-float required to move the gold producer to a premium London listing. If enough High River shareholders swap their stock for paper in Nord Gold, the free float could virtually double from current levels of under 11 per cent.
The miner said earlier this year it would seek to make its tightly held shares more accessible, but market conditions have made a sale unpalatable for its core shareholder.
"(Nord Gold) has been established as a company suitable for U.K. premium listing … Its free float has been a limiting factor, and management is publicly committed to improving this," said Peter Bacchus, joint head of European Investment Banking at Jefferies, who advised Nord Gold on the bid. "The offer for High River minorities demonstrates this commitment."
Nord Gold is offering 0.285 Nord Gold global depositary receipts for each High River share held, or $1.40 in cash. The paper offer, which could boost the stock's limited London liquidity, represents a 17.2-per-cent premium based on closing prices on July 17 and a premium of 30.6 per cent based on the share price average over the previous three months.
At Tuesday's closing price, the paper offer values High River at $1.2-billion, or almost 60 per cent of the value of the fully consolidated Nord Gold.
"It is value accretive, on our current forecasts, and I also think there is a liquidity kicker – it is really beneficial for both companies to get the liquidity up, as that has been holding the stock back," analyst Erik Danemar at Deutsche Bank in Moscow said. "There may be a third factor also – for any company, streamlining the asset structure is beneficial."
Nord Gold has in the past held informal talks with High River minority shareholders on an offer. It said in a statement on Wednesday that it had lock-up agreements with a number of "substantial" High River investors – including three of the largest and former executive management – under which the shareholders have accepted the paper offer. They amount to around 28 per cent of the shares the miner is seeking to buy.
High River said separately on Wednesday it had established a committee of independent directors to look into the offer and would engage a financial adviser for a formal valuation.
In a trading update issued alongside news of the bid, Nord Gold said it had increased gold production 6 per cent in the second quarter on the previous three months, to 165,300 ounces, but cut its forecast for the full year after production bottlenecks hit several mines.
The miner said it expected production to "significantly improve" in the second half as it resolved output hiccups with new equipment and, in the case of Russian mine Buryatzoloto, a new geological model.
But it now expects 2012 output at 720,000 to 770,000 ounces, down from a previous target of 800,000 to 850,000. It is still aiming to lift that to one million gold equivalent ounces in 2013.
Full details of the formal offer to High River Gold shareholders are due to be sent "as soon as practicable" after an independent valuation of High River's shares is carried out.
Investment bank Jefferies is acting as financial adviser to Nord Gold, while Troika Dialog is joint financial adviser.