Metallica Resources, New Gold and Peak Gold Announce Three-Way Merger

Get out while the going is good. That's the advice to New Gold Inc. (NGD) investors from Raymond James analyst Tom Meyer, following Tuesday's three-way merger announcement between New Gold, Metallica Resources Inc. (MRB) and Peak Gold Ltd. [PIK/TSX-V]

In a research note Mr Meyer said:

We believe the announcement of the proposed business combination provides a good opportunity to sell the shares at a premium over our estimate of underlying asset value.

He noted that in addition to the merger announcement, New Gold said it is increasing the capital cost for its 100% New Afton project from C$490-million to C$592-million. The analyst lowered his net asset value from C$6.53 to C$4.70 per share as a result, saying the capital cost inflation will "result in further share dilution." He has an "underperform" rating and C$5 price target on the stock.

Mr. Meyer added that New Gold is also in the process of applying for certain permits for its New Afton project. If the permits are not obtained by June 28, 2008, he said, the company may be obligated to offer to redeem indenture notes at par value of C$237-million from the holders.

"The New Afton project is marginal, in our view, and better projects exist," he wrote. For investors looking for opportunities in the New Gold space, Mr. Meyer said he prefers Centenario Copper Corp. [CCT/TSX] or Equinox Minerals Ltd. (EQMIF.PK) shares as near-term producer alternatives.

Wellington West analyst Catherine Gignac, meanwhile, continues to rate New Gold with a "buy" recommendation and C$12 price target. She told clients that the proposed merger would provide cash for mine development and market liquidity.

"The cash shortfall could be covered to allow New Afton mine development to continue uninterrupted," she said, adding the new merged company would immediately start bringing in cash flow from three open pit gold, copper and silver mines in mining-friendly countries such as Mexico, Brazil and Australia.

New Gold shares were up C$0.02 to C$7.17 at 2:30 p.m yesterday.