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Newmont Mining Corp. has offered to pay $4.2-billion (U.S.) in a share-exchange to acquire Australia's Normandy Mining Ltd. and Canada's Franco-Nevada Mining Corp., creating the world's largest gold producer.

The surprise move tops an offer on Sept. 5 by South Africa's AngloGold Ltd., the world's largest gold mining company, to acquire Normandy as it attempts to diversify its gold holdings out of South Africa.

The king-makers in the transaction are Seymour Schulich and Pierre Lassonde, co-founders of Toronto-based Franco-Nevada, which owns 19.9 per cent of Normandy.

Franco-Nevada, a gold royalty and investment company, has pledged its stake in Normandy to Denver-based Newmont. Franco-Nevada has agreed to merge with Newmont, once Newmont's stake in Normandy reaches 50.1 per cent. Newmont is currently the world's second-largest gold producer.

The three-way mega-merger would create a combined market capitalization of $8.1-billion, rivalling that of Barrick Gold Corp. of Toronto, following its proposed merger with Homestake Mining Co., a California company.

Newmont, with a market capitalization of $3.9-billion, is exchanging its common shares for Franco-Nevada's, which are worth $2.5-billion, and those of Normandy, which are worth $1.7-billion, based on the respective closing prices of the shares Wednesday on the New York, Toronto and Australian stock exchanges.

The transaction may also be seen as sweet revenge for Franco-Nevada. AngloGold made its bid for Normandy without talking to Franco-Nevada. It has also been widely speculated that AngloGold may have had some influence on the South African government's rejection last year of a proposal by Franco-Nevada to merge with Gold Fields Ltd. of South Africa.

Gold Fields is often seen as a takeover target of both AngloGold and Barrick.

AngloGold said Wednesday it is reviewing its options as a result of Newmont's higher bid for Normandy.

The drive behind the three-way merger has as much to do with designing a company the executives think will attract an increased institutional following as it does with rationalizing the gold mining industry.

"Are we going to lower the cost [of production]by $10 or $24 an ounce? No," said Wayne Murdy, Newmont's president. Newmont's cost of production is $174 an ounce. Gold closed unchanged Wednesday at $277.80 an ounce.

Newmont hopes to realize savings of almost $80-million a year as a result of the merger. But the new company will offer huge liquidity, geographic diversification and $700-million a year in cash flow, he said.

Newmont also said that for every increase of $25 an ounce in gold, its cash flow will rise by $162-million, making it the most highly leveraged gold producer.

"This is going to be America's gold company," Mr. Schulich said.

The new company also has a mantra that it will not hedge gold, although such strategies have been proven to protect producers in downswings and to enhance the price producers get on their sales. Newmont repeatedly stressed to analysts in a conference call that it plans to eliminate its hedge position and those of Normandy if the takeover is successful.

The executives of Newmont and Franco-Nevada said they hope to get what they described as a "re-rating" of their shares in the market because investors will pay a higher share-price multiple relative to their cash flow and profit. To this end, they said they hoped the stock price would help them get the same multiple as Barrick.

Barrick is the industry's most profitable gold mining company because of its low cost of production and hedging strategies. Barrick's cost of production is about $156 an ounce and during the past 14 years it has gotten an additional $68 an ounce above the spot price of gold, or more than $1.5-billion in added profit, because of its hedging strategies.

"We all believe in God and we pray for a higher gold price, but we don't believe our religious beliefs will affect the price of gold," said Vince Borg, a spokesman for Barrick. "They are gambling on a commodity - the price of gold. This is not a game of chance."

Newmont currently has a relatively small hedge position, although it has hedged in the past. Newmont's profitablity has also been erratic because of its high debt level.

Part of Newmont's motivation for the merger is that next year it has to refinance $1.1-billion in debt, said John Ing, the president of Maison Placements Inc., a Toronto investment dealer.

If Newmont succeeds in joining with Franco-Nevada, which is debt-free and has cash of almost $900-million (Canadian), the ratio of its debt to capitalization will fall to 18 per cent from 40 per cent. Newmont's total cash on hand will rise to $700-million (U.S.).

Newmont also said it plans to reduce its long-term debt from the company's future cash flow.

As part of the deal, Franco-Nevada - a gold royalty company - will become the merchant banking arm for Newmont. Mr. Schulich, who will remain in Toronto, will be its chairman.

The merchant banking arm will concentrate on gold, diamonds and platinum and palladium royalties and will continue to hold its oil and gas royalties in the Arctic, Mr. Schulich said.

The merchant bank is also expected to handle the sale of many of the smaller gold mines and properties Newmont has in its asset portfolio.

Mr. Lassonde will become president of Newmont following the merger and will move to Denver. Mr. Murdy will become chairman and chief executive officer of the newly merged company.

Newmont's acquisition will increase its production to 8.2 million ounces of gold a year, up from five million ounces, and expand its gold reserves to 97 million ounces.

Its land holdings will be equal to the size of Britain, officials said. It will have 22 mines on five continents and interests in eight other gold mine operations, with 70 per cent of its assets in North American and Australia. It will employ 12,500 people.

Newmont is offering 0.8 of its shares for one Franco-Nevada share and 0.0385 for each Normandy share, along with an additional 5 cents (Australian) if 90 per cent are tendered.

Robert Champion de Crespigny, Normandy's chairman and CEO, said he and two other key shareholders are supporting the Newmont bid.

Franco-Nevada has agreed to pay breakup fees of up to $100-million (U.S.) to Newmont if the deal fails to go through, while Normandy has agreed to pay Newmont $38.3-million (Australian) if the deal fails.

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