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Tuesday, April 1, 2008

Neo-Wheaton Rebirth Clearer as Old Hands Merge Peak, Metallica & New Gold:

Neo-Wheaton <http://www.resourceinvestor.com/pebble.asp?relid=41565&t=60>
Rebirth Clearer as Old Hands Merge Peak, Metallica & New Gold:


Resource Investor - News that trades


Neo-Wheaton Rebirth Clearer as Old Hands Merge Peak, Metallica & New Gold

By Tim Wood
31 Mar 2008 at 01:43 PM

St. LOUIS (ResourceInvestor.com
<http://www.resourceinvestor.com/pebble.asp?relid=41565&t=60> ) -- Today's
$1.3 billion all-stock merger of New Gold [AMEX:NGD
<http://finance.yahoo.com/q?s=NGD> ; TSX:NGD
<http://finance.yahoo.com/q?s=NGD.to> ] with Peak Gold [TSX-V:PIK
<http://finance.yahoo.com/q?s=PIK.v> ] and Metallica Resources [AMEX:MRB
<http://finance.yahoo.com/q?s=MRB> ; TSX:MR
<http://finance.yahoo.com/q?s=MR.to> ] presents a familiar scenario for
natural resource investors. The most powerful mining capitalists in North
America are assembling a metal operation using much the same model as
Wheaton River Minerals. Wheaton emerged from the industry backwaters to
become the effective controlling interest in Goldcorp, a company today worth
almost $30 billion.

The New Gold brand is being retained in a deal that sees stockholders
receiving one tenth of a New Gold share for each Peak share they own, and
nine-tenths of a New Gold share for every Metallica share owned.

According to a statement the new company is projecting gold production of
297,000 ounces of gold this year and 335,000 ounces in 2008 from operations
in Australia, Brazil and Mexico. As with Wheaton, copper and silver
by-product revenues will keep reported costs extremely low; at just $340/oz
of gold according to the companies. The new company boasts an adequate mine
life of around 10 years thanks to reserves of 3.2 million ounces of gold
65.3 million ounces of silver, and 986 million pounds of copper.

Little surprise then that the stock prices for all three entities increased
as the market digests a board comprised of Clifford Davis, Robert Gallagher,
Pierre Lassonde, Craig Nelsen, Paul Sweeney and Ian Telfer.

Lassonde and Telfer are the hinges here, just as they were with Wheaton. In
the climate of the current credit crisis, their connections to mining's
financing aristocracy are especially valuable. Ironically, it may have been
New Gold's disastrous flirtation with collateralized debt obligations that
opened the door more fully for the current deal.

New Gold had to impair $50.1 million last year on failed investments in
non-bank sponsored asset backed commercial paper.

Take careful note of the involvement of Endeavour Financial and GMP
Securities. Both firms were critical to Wheaton's ability to funnel vast
amounts of premium scrip to the institutional and retail markets. In an era
when it is more difficult to raise competitive financing, an arterial
connection to Canada's money machine is imperative.

Of course, the Wheaton team's read of market sentiment was the foundation
for all that jobbing: 1) that metal prices would continue to rise strongly;
2) that investors would pay a premium for companies able to achieve large
percentage increases in output; 3) that paying takeover multiples
frightening to competitors was not an impediment to future deals or stock
ratings; 4) that investors could be promoted on a "gold company" that
included base and other metals in its assets; 5) that low unit costs were an
important psychological component of the story; 6) that exotic destinations
and assets needed to be avoided; 7) that competent managers and operators
wouldn't have to fear being on the wrong side of a takeover.

It's notable that the deal does not offer Metallica and Peak shareholders
the sort of premiums that have become de rigueur lately - the +30 percentage
points that have had investors salivating about takeover wars. Metallica
stockholders get just 13% more than Friday's closing price and Peak's
shareholders get 15% more.

Investors must be wary of assuming New Gold is Wheaton II on autopilot. That
experience is unlikely to ever be repeated, and we would argue that the
signal booster on Wheaton's share price was the cash flow from its share in
the Alumbrera operation. In 2003 it paid a hindsight's pittance for one
quarter of Rio Tinto's [NYSE:RTP <http://finance.yahoo.com/q?s=RTP> ;
LSE:RIO <http://finance.yahoo.com/q?s=RIO.l> ] share in Bajo de la
Alumbrera. When copper prices starting multiplying a short time after the
deal closed, Wheaton had the firepower to act more aggressively, and attract
higher stock ratings.

There is no obvious equivalent asset in the mix for New Gold. However, the
dearth of significant new metal discoveries, and diminishing pool of
companies available for resource investors to participate in, means New Gold
will attract a takeover / merger premium.


(c) Copyright 2008, Resource Investor.

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