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AngloGold says it''s better to lose Normandy than to overpay
By Alden Bentley
NEW YORK, Jan 3 (Reuters) -- The purchase of
Australia's Normandy Mining by Newmont Mining after a
four-month bidding war will not be a one-way ticket
higher for gold prices, but should be beneficial for
the downsizing gold industry over the long haul,
The takeover looked inevitable Thursday, raising the
specter that Newmont -- formerly North America's No. 1
and the world's No. 2 producer -- would unwind
Normandy's chunky forward gold sales exposure after
closing the deal to form a gold mining colossus
committed to a no-hedging policy.
But gold traders on Thursday yawned at the prospect of
a buy back of some 8 million ounces in Normandy's hedge
book. Indeed, analysts expect Newmont to conduct any
purchases discretely over time to avoid running the
thinly traded market away.
Spot gold last traded around $278.20/70 an ounce,
compared to Wednesday's New York close at $278.70/9.20.
On COMEX, gold futures for February delivery settled
down 70 cents at $278.50 an ounce.
quot;It should be positive for gold as they (Newmont) don't
hedge,quot; said a chief dealer at a major bullion bank.
quot;I don't know if the market has fully digested what
He added, quot;What it should do is put a floor
South Africa's AngloGold Ltd. declined to try to beat
Denver-based Newmont's latest sweetener. Newmont raised
the cash element of its offer by 10 Australian cents
per share, enough for the Normandy board to recommend
the A$4.30 billion (US$2.2 billion) Newmont package,
which values Normandy at A$1.93 a share.
The showdown over Normandy shows how high the stakes
are for the bloated gold industry, which hopes for
salvation through consolidation after years of
overhedging, overproduction and central bank selling
pushed gold price to a 20-year low near $252 in 1999.
Normandy, Australia's biggest gold company, produces
about two million ounces of gold a year, and its output
would make the winning bidder the world's largest gold
miner, seen as key to staying on the radar screens of
Newmont's offer Thursday is the sixth for Normandy
since a bid by AngloGold, currently the world's largest
gold producer, kicked off the takeover battle in
Newmont's attempt to become the top gold miner is tied
with an offer to buy Canada's Franco-Nevada Mining
Corp., a royalty company which already owned 19.9
percent of Normandy after an asset swap early this
year.Normandy Chief Executive Robert Champion de
Crespigny said Newmont's trading liquidity and planned
acquisition of Franco-Nevada enhanced the long-term
value of the deal over AngloGold's offer.
Newmont has vowed to dismantle Normandy's hedge book,
which strings forward sales out though 2010 at an
average price of A$585 an ounce. Gold currently fetches
about A$540 an ounce in Australia.
quot;Normandy's hedge book is very large and for that
reason, given the poor overall liquidity of the gold
market relative to other markets globally, it's going
to take time,quot; said Chad Williams, mining equity
analyst at TD Securities in Toronto. quot;We think
investors should be patient with Franco-Newmont's
actions regarding the Normandy hedge book.quot;
Hedging through use of forward sales and derivatives
lets mining companies lock in prices for future
production. This eliminates uncertainty in case market
prices fall but can also prevent a hedger from reaping
all the benefit if prices rise.
Newmont's policy differs from AngloGold, which has
hedged about 84 percent of next year's production at an
average of $281 an ounce.
By removing Normandy's hedge protection, Newmont shares
would would be the most highly leveraged of the major
gold miners to rising bullion prices.
They would offer portfolio managers a pure-gold-play
alternative to hedgers like AngloGold and Canada's
Barrick Gold Corp., the largest globally in terms of
market capitalization but ranked just behind AngloGold
in terms of production after completing its purchase of
California's Homestake Mining last month.
James Verraster, head of mining finance at Standard
Bank in New York, said the merger would be good for
gold prices, and therefore Newmont shares, over the
long term but doubted gold would see much of an
quot;Anything they are going to do, they are going to try
to do strategically,quot; he conjectured. quot;So if they are
going to buy back gold, they are going buy back at
times when the market seems able to handle it.quot;
quot;They would have short-term gains in the stock price if
they ran the market up but those wouldn't last,quot;
Verraster said. quot;It's more of the longer-term potential
benefit of taking Normandy out as a hedger that would
help the market.quot;
On the New York Stock Exchange, Newmont shares last
traded at $19.02 down 7 cents.