November 16, 2011 / 6:51 PM / 9 years ago

Shandong Gold offers $1 billion for Jaguar Mining

BEIJING (Reuters) - China’s Shandong Gold Group, the parent of Shandong Gold Mining Co Ltd (600547.SS) and a big gold producer, has made a $1 billion offer to acquire Brazil’s Jaguar Mining Inc JAG.N(JAG.TO), two sources close to the deal told Reuters on Wednesday.

Shandong Gold is offering $9.30 per share in cash, a 73 percent premium to Jaguar’s Tuesday close in New York. Jaguar shares surged more than 47 percent to $7.94 in afternoon trading on the New York Stock Exchange.

The deal would help Jaguar secure financing for its Gurupi project, which has been running into funding difficulties over the past year. Jaguar ran into a free cash flow shortfall this year as the expenses of developing Gurupi ate away on cash. The project is expected to start operations around 2014.

A purchase of Jaguar could also fuel mergers and acquisitions activity among so-called junior mining companies, which has remained dormant in recent weeks amid declines in minerals and precious metals prices. The prospect for a global recession is allowing cash-strong miners to buy smaller rivals at depressed valuations.

If Shandong is successful, the deal would be one of the biggest overseas acquisitions by a Chinese gold miner. The Chinese miner is also seeking to anticipate the possible approval of a law in Brazil’s Congress that could make it tougher for foreign miners to acquire local rivals and ramp up mining royalty payments.

Jaguar acknowledged in a press release later on Wednesday that it received proposals to buy the company over the past few weeks. The company hired financial and legal advisors to assist it, but warned the process may not end in a sale.

John Bridges, an analyst with JPMorgan Securities in New York, said that a competing bid for Jaguar is unlikely.

“This bid, if successful, would solve the financing issues Jaguar faces as it seeks to build its Gurupi project,” Bridges wrote in a note to clients. “As the scope of the project grows, it could face higher capital costs.”

Shandong Gold, which made the current offer about two weeks ago, “has prepared cash to get the deal done,” said one of the sources, who declined to be named because he was not authorized to speak to the media.

Taking advantage of a strong yuan, Chinese resources companies have been hunting overseas for the minerals needed to power the country’s fast-growing economy.

“This is a positive development for the overall sector,” said Yan Chen, metals and mining analyst at Standard Chartered Bank.

“So far, there are not a lot of Chinese companies that have bought gold resources overseas.”

Shandong Gold, a state-owned company, is one of China’s top three gold miners. Its listed arm produced 19.41 metric tons of mined gold in 2010. The group has said it owns about 800 metric tons of gold resources.

Jaguar Mining is one of Brazil’s fastest-growing gold producers, with operations in a prolific greenstone belt in the state of Minas Gerais. Jaguar’s main development project is Gurupi, which holds reserves of 2.3 million ounces.

Li Zhongyi, vice general manager of Shandong Gold in charge of international deals, declined to comment. A spokesman for Jaguar was not immediately available for comment.

GOLD BUYS

Gold, a traditional safe-haven investment, hit an all-time high in September, reaching $1920.30. It has since fallen about 8 percent, although it remains expensive by historical standards.

Acquisitions have been on the rise in the sector because companies, concerned about depletion at existing mines and poor new discovery rates, are desperate to increase their reserves, said Michael Jansen, a precious metals analyst with JPMorgan.

“Gold companies will tell you they are in the business of expanding mining supply organically, but in reality they are in the business of buying new assets, particularly in the case of many large miners who are struggling to replace lost production,” Jansen said at a conference in China last week.

There had been $28 billion worth of completed M&As in the gold sector so far this year, he said.

Notable deals this year include Newmont Mining Corp’s $2.3 billion acquisition of Fronteer Gold Inc and AuRico Gold Inc’s $1.5 billion deal to buy Northgate Minerals Corp.

Other recent resources M&A deals from China included Minmetals Resources Ltd’s planned $1.28 billion takeover of Africa-focused copper miner Anvil Mining Ltd and Sinopec Group’s C$2.2 billion ($2.1 billion) agreement in October to buy Canadian oil and gas explorer Daylight Energy Ltd.

Sinopec Group is the parent of China Petroleum & Chemical Corp (Sinopec).

Additional reporting by David Stanway in BEIJING, Guillermo Parra-Bernal in SAO PAULO, Polly Yam in HONG KONG, Rujun Shen in SINGAPORE and Michael Erman in NEW YORK; editing by Don Durfee, Vinu Pilakkott and Bernard Orr

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