Lihir Gold Rejects A$9.2 Billion Offer From Newcrest (Update3)

April 1 (Bloomberg) -- Lihir Gold Ltd. rejected a A$9.4 billion ($8.6 billion) cash and stock takeover from Newcrest Mining Ltd., a deal that would create the world’s fifth-biggest producer of the metal with 10 mines in five nations.

The bid values Lihir shares at A$3.98 each, 31 percent more than yesterday’s close. The offer from Newcrest, Australia’s largest gold mining company, is inadequate, the Port Morseby, Papua New Guinea-based company said today in a statement.

Buying Lihir would give Newcrest Chief Executive Officer Ian Smith mines in Papua New Guinea, Australia and Africa, amid gold’s longest rally since 1979. Shares in Lihir, which gave Newcrest access to some of its finances, gained 33 percent in Sydney trading, sparking a rise in gold mining stocks.

“They could agree a higher price with the Lihir board,” said Prasad Patkar, who helps manage about $1.6 billion at Platypus Asset Management in Sydney, including Lihir shares. A bid of about A$4.50 may be acceptable, he said. “They seem to be saying, ‘we’ll sell but for a better price,’ and they don’t want to be bound by conditions that could prevent a competing bid.”

Lihir, the second-largest gold mining company on the Australian stock exchange, rose A$1.01 to A$4.04 at the 4:10 p.m. Sydney time close. Melbourne-based Newcrest, which confirmed the offer, rose 2.9 percent to A$33.78.

Surplus Cash

Newmont Mining Corp., the largest U.S. gold producer, and BHP Billiton Ltd. are among mining companies that may make acquisitions this year as revived metal prices buoy finances, Citigroup Inc. said last week. Mining companies may have $91.3 billion of surplus cash, after paying dividends and capital expenditure, by 2012, according to the broker.

“The Newcrest bid reinforces that M&A activity in the mining sector is heating up again,” Cameron Peacock, an analyst at IG Markets Ltd., said in an e-mail. “This theme could support share prices across mining stocks going forward.”

Today’s offer, along with Bright Food Group Co.’s bid of A$1.75 billion for CSR Ltd.’s sugar unit and yesterday’s A$3.3 billion bid by Peabody Energy Corp. for Macarthur Coal Ltd., makes this year the busiest start to a year for takeovers of Australian companies in at least a decade.

Share Offer

Newcrest on March 29 offered one of its shares for every nine of Lihir’s, plus 22.5 cents cash, less any dividend declared this half, Newcrest said today in a statement. It had made an initial proposal of one of its shares for every 9.5 Lihir shares on Feb. 15, it said.

Gold jumped to a record $1,226.56 an ounce in December, rallying for a ninth year, as governments cut interest rates and committed trillions of dollars to prop up economies, while central banks in India and China bought bullion.

Newcrest is offering to pay 18 times earnings before interest, tax, depreciation and amortization, or EDITDA, compared with the median multiple of 24 times for 10 gold mining industry deals complied by Bloomberg data. Lihir is trading at 26 times future earnings, compared with 24 times for Newcrest.

“Lihir are not going to give it away, it’s not a fire-sale, they don’t need Newcrest,” Lucinda Chan, division director and head of Asian business at Macquarie Private Wealth in Sydney, said. “If they want it bad enough, they’ll be back for it.”

Lihir is “worth a lot more than was reflected in the offer,” Chairman Ross Garnaut said today on Bloomberg TV.

The takeover would deliver pretax cost savings of A$85 million a year, Newcrest said. Savings could be greater than that once its examined Lihir’s operations more closely, Smith said on a conference call today.

‘Friendly Basis’

“If we were to come back on a friendly basis then they would listen or be open,” Smith said. “We have no intention at this particular point in time of making this a hostile affair.”

The combined group would have a market value of A$24.5 billion, sales of A$3.9 billion and production of 2.8 million ounces a year, it said, based on 2009 figures. It also would have the world’s fourth-biggest gold equivalent reserves.

Lihir is targeting a 40 percent gain in average output to 1.45 million ounces from 2012 to 2016. Last year it produced 1.124 million ounces from its mines in Australia, Papua New Guinea and the Ivory Coast in West Africa. Its biggest asset is the Lihir mine in Papua New Guinea, the world’s fourth-biggest by reserves, according to Southern Cross Equities Ltd.

The offer is about 1.5 times Lihir’s net present value which is “in line with where the stock has traded historically, so arguably it doesn’t incorporate a significant premium,” RBS Equities Australia Ltd. analyst Lyndon Fagan said today. “You can’t rule out another offer.”

Output Boost

Newcrest’s Smith last year outlined a five-year plan to boost output 40 percent from its mines in Indonesia and Australia and is studying a A$2 billion expansion at its Cadia Valley operation. It said in January that it’s targeting full- year production of between 1.81 million and 1.91 million ounces.

“There’s no obvious synergies because geographically there’s no overlap,” RBS’ Fagan said. Still, “Newcrest management could add a lot of value to Lihir’s operations.”

Lihir today named Graeme Hunt, a former senior executive at BHP as chief executive officer, replacing Arthur Hood who resigned in January after his contract was not renewed. Hood led the acquisition of Ballarat Goldfields NL in 2006, which resulted in the company booking $413 million of one-time charges. The Ballarat mine was sold last month for A$4.5 million.

Newcrest is advised by Lazard Ltd. and Merrill Lynch, a Bank of America Corp. unit.

To contact the reporters on this story: Rebecca Keenan in Melbourne at rkeenan5@bloomberg.netShani Raja in Sydney at sraja4@bloomberg.net

Last Updated: April 1, 2010 02:39 EDT