Newmont Mining's Yanacocha mine in Peru
Gold giant Newmont Mining Corp. is sticking close to home for future production growth by acquiring Nevada-focused explorer Fronteer Gold Inc. in a deal valued at $2.3-billion.
Newmont is offering $14 per share for Vancouver-based Fronteer, whose flagship asset is the Long Canyon development project located near Newmont's existing operations in the prolific gold-producing state of Nevada. Newmont, based in Denver, will spin off Fronteer's lesser-known exploration assets into a public company called Pilot Gold.
Newmont, one of the world's biggest gold producers, is paying a rich 37-per-cent premium for Fronteer, showing the steep prices gold companies are willing to pay as they scramble to find growth amid a shrinking global supply of known reserves. The acquisition is the latest in a string of mining deals announced in recent weeks as companies rush to deploy cash built up from soaring commodity prices to buy new assets.
Among the top-tier producers, Newmont has been singled out by some analysts as the company most in need of finding future growth, especially after rival Goldcorp Inc.'s acquisition spree over the past year.
But Newmont said the acquisition is driven by Fronteer's strong potential for further discoveries, rather than pressure to show growth at any cost.
"We don't have a gun to our head to do an acquisition," Newmont chief executive officer Richard O'Brien said in an interview. Newmont noted it saw more value in buying development assets in today's market rather than mines already in production.
"We will look for current production when we can find it for value and we will add incremental acquisitions which will add long-term prospectivity," Mr. O'Brien said. "I think that is what you can continue to see from Newmont."
As for the premium, he said: "We feel like we paid a fair value for the company." By comparison, Goldcorp paid a 35-per-cent premium for its $3.6-billion acquisition of Andean Resources Ltd. last fall.
The offer for Fronteer comes as gold prices hover around $1,350 (U.S.) an ounce, well off the record $1,430 an ounce reached in December. Still, many investors, and gold miners in particular, believe bullion will continue its steady climb, which will keep producers pumping out healthy profits.
Newmont believes that, with further exploration on the Long Canyon site, the project has more potential than has so far been identified. Fronteer said it has currently identified 4.2 million ounces of "measured and indicated" gold resources at its three main projects in Nevada. Production at the key Long Canyon project is still about six years away.
Buying Fronteer will help Newmont revitalize future growth plans in Nevada, where it has been producing gold for more than 50 years.
"We are willing to go almost anywhere in the world, but we always like to go where we can realize a higher return," Mr. O'Brien said of his company's decision to buy an asset close to it core production base. Newmont also has operations in Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico.
Fronteer and Newmont are also joint-venture partners in the Sandman project in Nevada, which is how the relationship between the two companies first developed.
Fronteer has been restructuring itself into a pure gold player over the past year. Last summer, it bought the half of the Long Canyon project it didn't own, and earlier this week it closed a deal to sell its Aurora Energy Resources Inc. uranium assets to Paladin Energy Ltd.
Pilot Gold, the new company to be spun out of the Newmont-Fronteer deal, will hold Fronteer Gold's exploration properties in Nevada, Turkey, and Peru. Newmont will provide $10-million in cash and will hold a 20-per-cent stake in Pilot, while Fronteer shareholders will hold the remaining 80 per cent.
Fronteer president and CEO Mark O'Dea will become chairman of Pilot Gold.
The deal needs the support of 66.6 per cent of Fronteer shareholders, as well as court and regulatory approvals. The agreement includes an $85-million break fee and gives Newmont a right to match any competing offers that may arise.