Northgate Minerals 1% Higher Despite Credit Suisse Downgrade; AuRico Gold Up 3%

Northgate Minerals (NGX.TO) is up 1% despite getting a downgrade from Credit Suisse while its suitor AuRico Gold Inc (AUQ.TO) is 3% higher.

"We are revising our NGX rating to Neutral from Outperform based on valuation as the stock rallied 27% on the back of yesterday's announcement of the proposed acquisition of NGX by AuRico Gold (AUQ.TO). We believe the deal will close as per the stated terms outlined and consider a competing NGX offer unlikely given the 61% premium offered by AUQ. NGX's shares have now largely achieved our Target price, and we see insufficient upside in NGX shares going forward to maintain our Outperform rating. We are maintaining our $4.00 Target price based on a pro-rata share DCF of $2.76/sh (at 26.7% of a total new DCF of NewCo's $10.35/sh), to which we apply a 1.3X P/NAV multiple (revised from 1.2X to reflect a better asset mix) and add $0.17/sh in pro-rata net cash at par."

Credit Suisse added: "While the Newco is a more attractive proposition for AUQ shareholders, we believe the risk now outweighs the reward for NGX shareholders as Young Davidson enters the final construction phase, and AUQ will have to face asset integration and operating six assets up from one, just two quarters ago."

Deal Terms: "The deal has been approved by the Boards of both companies. AuRico's bid for NGX is comprised of 0.365 AUQ share (or USD5.08/sh) for 1 NGX share, representing a 61% premium over Friday's close and a total bid value of USD1.4B. AUQ and NGX shareholders will own approximately 62% and 38% of the NewCo, respectively. The plan of arrangement requires approval by 66 % approval by NGX shareholders and over 50% of AUQ shareholders with the deal expected to close by then end of October. A break fee of $45M applies for NGX and $28M for AUQ. The previous arrangement agreement with Primero Mining Corp announced on July 12th, 2011 has been terminated with NGX paying Primero a break fee of $25M."

"AUQ is paying approximately $391/oz reserves and $194/oz resources which we consider fair value, given the higher cost ounces from Stawell and Fosterville. NGX is getting 38% of Newco but will be providing 58% of 2011 production and 45% of reserves and resources."

EPS Changes:" After incorporating Q2/11 earnings results and model updates, we have lowered our EPS for FY11 to $0.07 from $0.13. Our financial statement forecasts continue to account for NGX on a standalone basis."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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