Canada's Eldorado Gold Corporation yesterday announced that it will use its own shares to acquire all the issued and outstanding shares in Sino Gold Mining, in a deal that values the target at A$2.2 billion ($1.83 billion).
Eldorado already owns a 19.8% stake in the China-based gold mining and exploration company, which is listed in both Australia and Hong Kong. The combination of the two miners will produce a company with a market capitalisation of C$6.4 billion ($5.8 billion) that is 75% owned by Eldorado shareholders.
"The business combination with Sino Gold enables Eldorado to realise its vision of establishing a leading presence in China," Paul Wright, president and chief executive officer of Eldorado, said in a written statement.
The Toronto-listed gold producer is offering Sino Gold's shareholders a ratio of 0.55 Eldorado shares for each Sino Gold share held. The exchange ratio represents a value of A$7.24 per Sino Gold share, based on Eldorado's closing price of C$11.96 in Toronto on Tuesday. This marks a 21.3% premium to Sino Gold's closing price in Australia on Tuesday and a 32.3% premium to the company's 30-day volume-weighted average price.
The deal is subject to regulatory and court approvals in Australia and Sino Gold's shareholders are also required to give the deal the go ahead.
Sino Gold's directors have unanimously recommended that its shareholders vote in favour of the deal: "Sino Gold's view is that the best value-creating opportunity for its shareholders is as part of a leading low-cost intermediate gold company," Sino Gold's president and CEO Jake Klein said in a press release. "We believe that this merger with Eldorado gives our shareholders exposure to such a company on attractive terms."
Once the deal is completed, Eldorado will pursue a secondary listing in Australia.
The deal will strengthen Eldorado's position in China, the world's largest gold producing country. The combined production capacity of the two companies will be 550,000 ounces a year from four mines. By 2011, two more mines are expected to come online, further increasing the capacity to 850,000 ounces. And by 2013, production is expected to surpass 1 million ounces a year.
The post-merger company will have unhedged proven and probable gold reserves of 12.7 million ounces from 18.8 million ounces of measured and indicated resources. There will also be as much as 5.3 million ounces of inferred reserves.
Sino Gold owns 82% of the Jinfeng Gold Mine in Guizhou province, the second largest gold mine in China, which in 2008 produced 151,000 ounces. It also owns 95% of the White Mountain Gold Mine in Jilin province, which started production in January, and has another mine in the pipeline -- the Eastern Dragon Project in Heilongjiang Province. The company says the latter mine has the potential to become a low-cost gold production centre.
In addition to its interests in China, Eldorado has gold mining projects in Brazil, Greece and Turkey.
Sino Gold released its half-year financial results yesterday. Revenues from gold sales increased 51% year-on-year to A$139.9 million. And net profit amounted to A$15.3 million, compared with a A$5.8 million loss in the same period last year.
China is fast becoming one of the most important players in the global gold industry. In 2008, it produced more than 9 million ounces, nearly double what it was extracting 10 years ago. It already provides the world with 12% of its gold, but since large chunks of China have yet to be explored, new reserves could be discovered which could further increase production.
Eldorado is getting financial advice from Macquarie, and legal advice from Freehills in Australia and Fasken Martineau DuMoulin in Canada. Sino Gold is being advised by Goldman Sachs JB Were, with legal advice from Allens Arthur Robinson in Australia and Cassels Brock and Blackwell in Canada.