May 31, 2013 / 4:39 PM / 4 years ago

UPDATE 1-New Gold to acquire exploration company Rainy River

3 Min Read

By Euan Rocha

TORONTO, May 31 (Reuters) - New Gold Inc agreed on Friday to acquire gold exploration company Rainy River Resources Ltd for about C$310 million ($301 million) in a sign of a life for the dormant Canadian small-cap mining sector.

The deal, which will give Vancouver-based New Gold control of Rainy River's namesake gold project in northwestern Ontario, sent New Gold's shares up 36 percent in midday trading.

Juniors in the sector have been hurt badly by the sharp pullback in the price of gold along with budget blowouts and other concerns at their larger peers.

This has prompted a huge exodus of investment from both the overall mining sector and early-stage exploration players in particular. It has led to a 53 percent drop in the last year of the Thomson Reuters Canada Gold Index, which includes a cross-section of large- and small-cap gold miners.

New Gold is offering 0.5 of its common share for each Rainy River share tendered, or C$3.83 in cash. This represents a 42 percent premium over Rainy River's closing price on Thursday on the Toronto Stock Exchange.

But the offer is substantially below Rainy River's all-time high of C$13.50 a share in February 2011.

Stifel Nicolaus analyst Craig Stanley believes the offer is a fair price and does not expect a rival bid to emerge.

"Though Rainy River shareholders will own just 5 percent of the combined company, this dilution is somewhat offset by the financing risk, and associated equity dilution, if the company tries to develop Rainy River on its own," Stanley said in a note to clients.

Rainy River said the deal gives shareholders certainty about the development of its project, and the equity component of the deal gives them an opportunity to enjoy further gains when the industry cycle turns and gold prices begin to rise again.

"This offer initially started as an all-cash offer and we made it clear that would not even be considered by our board and shareholders," said Dale Peniuk, chairman of Rainy River's special committee of directors, who reviewed the deal.

"We have received some feedback from our shareholders, and it has generally been very, very positive," he added.

The deal was unanimously approved by Rainy River's board. The directors and management team have also agreed to tender their shares in favor of the offer.

BMO Capital Markets, which co-led Rainy River's C$58 million equity offering late last year, acted as Rainy River's financial adviser, while the legal advisers are Bull, Housser & Tupper LLP and Davies Ward Phillips & Vineberg LLP.

New Gold's financial adviser was RBC Capital Markets and its legal advisers were Cassels Brock & Blackwell in Canada and Paul, Weiss, Rifkind, Wharton & Garrison LLP in the United States.

Shares of Rainy River were up 97 Canadian cents at C$3.67 in mid-day trading on the Toronto Stock Exchange, while New Gold was down 8 percent at C$7.05.

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