New Gold Inc. (USA) (NGD), Rainy River Resources Limited (RRFFF): Premiums and Potential Profit From This Gold Acquisition

Vancouver-based New Gold Inc. (USA) (NYSEMKT:NGD) recently announced that it would acquire upstart Canadian gold miner Rainy River Resources Limited (NASDAQOTH:RRFFF) for about C$370 million. At current exchange rates, this translates to a purchase price of about $355 million. Due to the corporate structure and asset portfolio of Rainy River Resources Limited (NASDAQOTH:RRFFF), this deal is quite straightforward. Since the smaller company owns just one production-ready asset, New Gold Inc. (USA) (NYSEMKT:NGD) is effectively buying a ready-to-go gold mine that has been managed well during the course of its relatively short lifespan.

However, all mergers carry some risk. Before investors rush into this situation, they should analyze it from every angle and look carefully at the underlying financial health of the two firms. Moreover, investors may wish to evaluate the health of the gold market to determine whether this merger’s value can be maximized over the long term.

New Gold Inc. (USA) (NYSEMKT:NGD) competes directly with a number of Canadian mining companies that exploit copper, gold, silver, molybdenum and other minerals. Since the bulk of the company’s leases lie on Canadian soil, it would make sense to compare it to a firm that deals with a similar basket of assets. Although plenty of candidates fit this bill, Taseko Mines Limited (USA) (NYSEMKT:TGB) offers a solid comparison.

In 2012, Rainy River Resources Limited (NASDAQOTH:RRFFF) reported a loss of about $65 million and little in the way of revenues. This is largely due to the fact that exploration work continues at Rainy River Resources Limited (NASDAQOTH:RRFFF)’s eponymous gold-mining project in northwestern Ontario. For comparison, New Gold Inc. (USA) (NYSEMKT:NGD) reported 2012 income of about $202 million on revenues of around $824 million. Taseko Mines Limited (USA) (NYSEMKT:TGB) notched a narrow loss of about $20 million on revenues of just under $230 million. Meanwhile, Taseko Mines Limited (USA) (NYSEMKT:TGB) reported a cash hoard of about $87 million and total balance sheet liabilities of around $268 million. New Gold Inc. (USA) (NYSEMKT:NGD) had debts of just over $850 million and cash equivalents of $672 million, and Rainy River Resources Limited (NASDAQOTH:RRFFF)reported a debt load of just $7 million against a cash hoard of nearly $100 million.