3rd UPDATE: Lihir Accepts A$9.5 Billion Newcrest Bid, Still Talking To Rivals

Lihir Gold Ltd. (LGL.AU) has endorsed a sweetened A$9.5 billion takeover from Newcrest Mining Ltd. (NCM.AU) that could form the world's fourth largest gold miner but has retained the right to continue talks with rival bidders, the companies said Tuesday.

The two Australian miners said they have entered into a merger implementation agreement that allows Lihir "to continue existing discussions with third parties" until June 8. The discussions are with multiple parties and at "various stages", Lihir Chairman Ross Garnaut told reporters.

Lihir's ability to keep shopping itself around is unusual for a board-approved takeover bid and a large chunk of the merger agreement is devoted to detailing conditions of the concession, suggesting there's a solid level of interest from potential interlopers.

On the other hand, Lihir's shares are trading at a high level relative to the group's earnings, which could deter offshore bidders from risking a rival bid.

"We put a low probability on a competing bid from a third party given the premium multiples that Newcrest and Lihir trade on to North American peers," Citigroup analysts said.

A soaring gold price has seen both Newcrest and Lihir tipped as possible takeover targets for gold majors looking to replace reserves, with Barrick Gold Corp. (ABX), Newmont Mining Corp. (NEM) and Anglo American Plc (AAL.LN) suggested as possible suitors for the Papua New Guinea-focused group.

Newcrest is now offering one Newcrest share for every 8.43 Lihir shares, plus 22.5 Australian cents cash per Lihir share, less any interim dividend paid. The offer was worth A$4.03 per Lihir share immediately before it was announced to the market.

It's a 6.4% improvement on Newcrest's previous offer, which Lihir rejected, of one of its shares for every nine Lihir shares, plus 22.5 Australian cents cash per share.

At market close Tuesday, Lihir shares had risen 3.3% to A$3.79, a little under the A$3.87 implied value of Newcrest's (NCM.AU) offer after Newcrest shares fell to A$30.69.

The improved offer comes just days after Australian lawmakers flagged a 40% tax on the mining industry's super profits but executives from both companies played down any possible impact on the deal's value.

The tax only applies to Australian assets and the bulk of Lihir's operations are in Papua New Guinea.

Still, the fact that Lihir shareholders will receive a large portion of Newcrest shares if the deal progresses means the potential tax changes could effect the deal's ultimate value to Lihir shareholders.

Garnaut told reporters that the 40% tax was largely expected to be broached by the government and that Lihir had factored that expectation into its decision to recommend Newcrest's offer after a meeting of the companies' respective chief financial officers.

Lihir has also appointed an independent expert to assess the merits of Newcrest's bid, including the possible impact of the tax changes.

Newcrest Chief Executive Ian Smith said the proposed tax could reduce Newcrest's net present value by about 5%, although he said it's unlikely the legislation will pass through both Australian houses of parliament in its current form.

"The expectation of this going through parliament in its present configuration, if you want to put a probability on it, I'd put it at a fairly low number," Smith told reporters.

Smith said he's confident Newcrest isn't paying too much for Lihir, despite describing its previous offer as "full and fair".

"We were full and fair before, we're just slightly more fuller and slightly more fairer," he said.

In a joint presentation, the companies said the fused group would operate mines across Australia, Papua New Guinea, Indonesia, Ivory Coast and Fiji.

The company would have a combined market value of about A$24.5 billion, with annual revenue of A$3.9 billion.

Supply from the world's gold mines is set to decrease and the world's central banks are unlikely to put more gold on the market, although supply might kick up a little this year as Australia's Boddington mine comes on line, Smith said.

"All of that combines to a situation where you could see an industry that'll drop about 25% of its supply in the short term--now that has a massive impact," Smith said.

A merged Newcrest and Lihir would be the world's fourth largest gold miner by market capitalization and reserves but the fifth largest by production.

Lihir last month hired Macquarie Capital Advisors and Greenhill Caliburn to assess strategic alternatives for shareholders and prepared a data room to assist potential acquirers.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; Ross.Kelly@dowjones.com

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