Dealtalk: Northgate bid a risky step in AuRico makeover

TORONTO Wed Aug 31, 2011 6:29pm EDT

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TORONTO (Reuters) - AuRico Gold (AUQ.TO) is having a difficult time escaping the image of being a miner more prone to delivering disappointment than gold bars.

The Mexico-focused, Toronto-based company announced a C$1.46 billion ($1.5 billion) takeover offer for Northgate Minerals NGX.TO this week, a deal that would double its production and expand its geographic footprint. Its stock price promptly dived.

At the core of the fall are fears that gains made by the company in the last year could be lost because it may be paying too high a price for Northgate, which has high costs and posted a loss in its last quarter, despite record metal prices.

"They did a big deal and they paid a huge premium," said a trader in the stock who could not be named due to company policy. "On the other hand, (AuRico's) stock had been on a tear ... and it has still outperformed the group in a big way on the year."

In the 12 months ahead of the Northgate bid, AuRico shares rose more than 80 percent, boosted by a turnaround effort that began in late 2007, when the company hired Rene Marion as chief executive and launched a multi-year plan to transform what had been a lurching plow horse into a stallion.

Under Marion's leadership, the company revamped its lagging Ocampo and El Cubo mines in Mexico and cleaned up a balance sheet that had been consistently in the red.

Marion also replaced a chunk of the company's board and identified strategic opportunities, including the takeover of Capital Gold and its promising El Chanate project in Mexico.

But the takeover bid for Northgate came just a few months after AuRico closed the deal for Capital Gold, and the rapid-fire rate of consolidation has some analysts worried.

"AuRico may be distracted from the positive momentum achieved in Mexico while integrating Northgate Minerals' assets," said BMO Capital Markets analyst David Haughton, who questioned the rationale behind deal in a note to clients.

"Any slippage in delivering improvements from Ocampo, El Chanate and El Cubo would be viewed negatively," he said, noting that the company was already set to nearly double output by 2015.

The friendly bid for Northgate, which most analysts expect will succeed simply because it is too rich to attract competition, risks having a negative effect on recent gains in investor confidence.

But some analysts say the pricey deal will ultimately help erase the "legacy of disappointment" that has haunted AuRico and its earlier incarnation as Gammon Gold.

"This is a strategic move by AuRico," said Barry Allan of Mackie Research. "It's about getting the assets to grow and diversifying."

BIGGER IS BETTER

In buying Northgate, AuRico - a combination of the letters "Au", the atomic symbol for gold, and "Rico", the Spanish word for rich - will boost gold equivalent production this year to 470,000 ounces from 280,000 ounces.

By 2013, output will be more than 730,000 ounces, putting AuRico in the same league as Centerra Gold (CG.TO), and just a few steps behind Iamgold (IMG.TO) and Yamana Gold (YRI.TO).

More than just adding ounces, the deal will give AuRico a foothold in Canada and Australia.

"What this really does is it takes them out of Mexico in a real way for the first time," Allan said. "This puts them in one of the more established mining areas of Canada."

In fact, it is Northgate's Young-Davidson project, located on the site of two defunct gold mines in northern Ontario, that is getting the most attention from the Street.

Start-up at the mine is expected in early 2012 with planned output in the range of 200,000 ounces a year.

More importantly, the project is located in a gold-rich region that straddles the border of Ontario and Quebec, and that could mean more deals are yet to come.

"AuRico is very anxious to build a midtier gold company through M&A," said Dahlman Rose analyst Adam Graf, noting that at current metal prices, the company has plenty of cash for smaller deals.

(Additional reporting by Pav Jordan; editing by Peter Galloway)

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