Meridian eyes Brancote’s Esquel project

Mid-tier producer Meridian Gold (MNG-T) has unveiled a plan to acquire London-based Brancote Holdings via an all-stock deal valued at about US$228 million.

Meridian is offering 0.1886 of a share for each Brancote share, valuing Brancote’s shares at US$2.56 apiece, a 2% premium over Brancote’s closing share price the day before the offer, and 17.5% better than its closing price on Mar. 7, the day before it was revealed that Brancote had been approached with a possible deal.

Brancote’s board has unanimously recommended the deal to shareholders, and the company’s largest shareholder, Australian businessman Kerry Packer with about a 19% stake, has entered into a binding agreement to accept the offer. Should a competing offer arise, Meridian has five business days to at least match, otherwise the binding agreements are terminated. The same applies if Meridian fails to declare its bid unconditional by the Sept. 30.

The key to the deal for Meridian is Brancote’s 74% stake in the Esquel gold project in southern Argentina. Brancote plans to consolidate ownership of the project and has entered into an agreement, conditional on Meridian’s offer for Brancote being declared unconditional, to acquire the remaining minority interests in the project through the issuance of some 27.4 million shares. Approval for the share issuance will face a shareholder vote at a yet-to-be-scheduled extraordinary general meeting.

Meridian plans to fast-track Esquel’s development with an eye toward completing a final feasibility study by the end of the year. Under the accelerated plan, construction would wrap up by the end of 2003 and commercial production could be up and running the following year.

The 433-sq.-km project lies in Chubut province, near the Chilean border at an elevation of 1,200-1,400 metres. The core area is at the southern end of Cordon Esquel and measures 3.5 km north-south and 1.5 km east-west. The massive vein system containing Galadriel, Galadriel Sur, Football Field, Julia and Elena Norte cuts diagonally across the core area in a northeast direction.

At the end of a fourth round of drilling in June, measured, indicated and inferred resources were estimated at 19.3 million tonnes grading 6.06 grams gold and 11.1 grams silver per tonne, or 3.8 million contained ounces gold and 6.9 million contained ounces silver, based on a cutoff grade of 1 gram gold. That, says Brancote, is enough to support a proposed 5,000-tonne-per-day open-pit mine for 6.5 years. Brancote believes there is potential to find enough additional ounces to push that to 10 years.

Proven and probable open-pit reserves are pegged at 10.4 million tonnes grading 8.46 grams gold and 14.57 grams silver, or a diluted 11.5 million tonnes grading 7.59 grams gold and 13.06 grams silver, using a dilution factor of 11.5% and zero grade. The overall waste-to-ore stripping ratio in three pits is 11.2:1 (9.9:1 diluted).

Annual production is projected at 500,000 oz. gold. Life-of-mine cash costs are forecast to average US$102 per oz., plus an extra US$9 per oz. for royalty and refining charges. Capital costs are pegged at US$131 million, plus or minus 25%, including US$41.2 million for indirect charges and contingencies.

Esquel is centred on a near-surface, low-sulphidation, epithermal high-grade vein system that extends over 2.4 km. The remaining interest is held by a private group of Argentine investors.

Meridian’s key asset is its high-grade El Peon mine in northern Chile.

During the final quarter of 2001, El Peon pumped out a record 88,342 oz. of gold at a cash cost of US$37 per oz., compared with the 75,692 oz. produced at US$45 apiece during the year-ago period. For the full year, El Peon poured 318,012 oz. at US$43 per oz., up from 288,721 oz. at US$48 per oz. in 2000.

At the end of 2001, El Peon’s proven and probable reserves stood at 4.7 million tonnes grading 11.8 grams gold and 198 grams silver. That’s up 16% based on tonnage basis and 18% on grade since the end of 2000 thanks to the discovery of the Diablada zone and definition drilling. The company says it currently has more gold at a higher grade than it had when the project first began.

Meridian expects El Peon to churn out 300,000 oz. at US$50 per oz. during 2002.

Meridian, which remains unhedged, expects the addition of Brancote to boost its annual gold production by 75% to about 700,000 ounces over the next two year. Cash cost are expected to ring in below US$100 per ounce.

Brancote has agreed to pay Meridian a US$1.5-million break fee should it recommend a competing bid before April 4, 2003. In the same vein, Meridian will reimburse up to US$400,000 of Brancote’s transaction expenses should it unilaterally terminate its offer.

The companies expect the deal to close in the first half of this year. Combined, the new Meridian would have about US$100 million in cash and no debt.

Brancote trades on the London Stock Exchange at 1.78 in a 52-week range of 183-1.65. In late-afternoon trade on the New York Stock Exchange, Meridian’s shares were US44 higher at US$14. The stock has a 52-week range of US$5.75-14.91.