Wednesday, March 4, 2009

NewGold (NGD) Acquires Western Goldfields (WGI)

New Gold and Western Goldfields announced today that New Gold is acquiring Western.

Both CEOs were on BNN around 1:35PM today explaining the deal (view clip here). Negotiations started in December 2008. During the last couple of months they performed due diligence and completed the paperwork. They say they are merging because WGI has cashflow but being a single mine, has no growth prospects; New Gold has growth prospects (3 mines), but no cash flow. Both companies have the same philosophy of operating only in mining friendly safe jurisdictions. "They fit like a glove". They do not see the need to raise nay further capital, all required capital will be coming from WGI's cashflow.

WGI is being bought a slight premium and is up 4% today. NGD is trading down 9.6%. These companies are, IMO, a "buy" as they are now have a bigger size and can be a target of acquisitions by one of the majors.

The combinec company will have diversified gold production base from three gold mines in mining-friendly jurisdictions with forecasted gold production of approximately 335,000 ounces in 2009, expected to grow to over 400,000 ounces in 2012 plus strong cash flow to fully fund the development at the New Afton gold-copper project in British Columbia. Also, the deal increases mineable reserves totaling 7.6 million gold ounces within a measured and indicated resource of 12.2 million gold ounces.

Existing New Gold and Western Goldfields shareholders will own approximately 58% and 42% of the combined company, respectively. This represents a premium of 19.2% to the closing price of Western Goldfields shares on the TSX on March 3, 2009 and 20.1% to the 20-day volume weighted average trading price of both companies' shares on the TSX.

Disclosure: I am a long time holder and believer of WGI.

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Neil said...

You seem to be reflecting the consensus view of the merger. I don't like the idea of giving up my low risk cash flows for substantially more speculative ventures in much riskier countries. A mine in Mexico or Peru does not have the same risk characteristics as one in the US. I'd like to have held on to WGI as markets improved. I'm not going to hold on to the new NGD.

The Shocked Investor said...

Thank you for the comment Neil. Those are good and valid points. The issue I had with WGI is, that while it had reasonable cashflow, it had no growth prospects and no ability to aise cash for acquisitions for quite some time. WGI is a very good company, but had limitations, which could be seen by its share price. I am also comfortable with Peru and Mexico.

BTW, I am also very comfortable with Chile and Brazil and the miners doing business there.

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