Merged gold giant could finally turn the market
By Virginia Marsh and Gillian O'Connor
Published: November 15 2001 21:05 | Last Updated: November 18 2001 20:03

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A few analysts were discussing the possible long-term consequences of the proposed $8bn Newmont/Franco Nevada/Normandy gold merger on Thursday.

If it goes through, it could turn medium-sized companies, such as Canadian Placer Dome - with a market capitalisation of $3.6bn - and South African Gold Fields - with $2bn - into Cinderellas.

Gold Fields' earlier break for freedom, when it tried to merge with Franco Nevada last year, was blocked by the South African authorities who did not want it to leave the country.

Even if Placer Dome was willing, it would need a change of heart from the authorities for a Placer/Gold Fields deal to be worthwhile.

An even more important consequence of the deal could be the long-awaited turn in the gold market.

Andy Smith of Mitsui suggested that if "New Newmont" - as their merged entity has been dubbed - uses its planned closure of Normandy's 9m-ounce hedge book to try and push the gold price up, it might be more successful than past attempts.

But most analysts were concentrating on the short term. Is Newmont's offer for Normandy, headed by chief executive Robert Champion de Crespigny, really much better than AngloGold's? And will AngloGold raise its own offer?

In Australia, where AngloGold's chief executive, Bobby Godsell, was drumming up retail support for his offer when the counterbid was made, some analysts argued that Newmont's bid was only higher than AngloGold's because it had been made with inflated US paper, and that the premium was being rapidly eroded as Newmont shares fell back.

In the US enthusiasts for the Newmont deal argued that its shares were only falling because the arbitrageurs were selling them.

One Australian analyst took a broader view: "All that matters in this deal is political risk and whether you really want to hold South African paper. There's something of the chicken and the egg, though, as Anglo has a good chance of getting a re-rating if it manages to pull this deal off."

If the AngloGold offer were to succeed, it would have 27 per cent of its operations in Australia, reducing its African exposure, and had hoped that this and its greater size would give its shares a higher rating.

Traditionally North American shares have the highest ratings, Australians are in the middle, while the South Africans are bottom of the heap.

Another Australian analyst pointed out that Newmont itself had some political risk: it is exposed to Peru and Indonesia.

He also pointed out that synergies resulting from the deal would be small.

Back in North America, Wayne Murdy, president and chief executive of Newmont, tacitly admitted both points while putting a positive gloss on the deal for North American shareholders: "The main attraction is that the three-way merger will add a whole new leg to the stool."

He argued that it would balance out Newmont's political risk, putting 70 per cent of its reserves in North America and Australia, and reducing relative exposure to higher-risk countries like Indonesia, or even Peru.

Australian analysts were also worried that dividends might suffer and that there might be limited liquidity of Newmont shares on the Australian stock exchange - North American investors tend to be less dividend-conscious than Australian ones.

They were also worried about the "break fees" payable if the Newmont deal did not go ahead, and uncertain what the triggers would be.

The fact that Franco Nevada, which owns 19.9 per cent of Normandy, is committed to Newmont's offer, made some analysts gloomy about the prospects of an increased offer from AngloGold.

"You have to have a lot of guts to go head to a head with a company that already has a 20 per cent stake in your target," said one. Additional reporting by Nikki Tait in Chicago




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