Eldorado eyes Tanjianshan gold (May 31, 2005)

Eldorado Gold (ELD-T) has accelerated plans to become one of China’s first North American-based gold producers with an agreement to acquire Afcan Mining (AFK-T) via a friendly share-swap valued at around $60 million.

Eldorado is offering one of its own shares for every 6.5 Afcan shares and will exchange share purchase warrants at the same rate. The exchange ratio values Afcan’s shares at 44 apiece, a 25% premium, based on each company’s volume-weighted average trading price over the 30 days prior to the deal’s announcement. Eldorado has already sewn up the support of shareholders owning 37% of Afcan’s outstanding shares, including some officers and directors.

With slightly more than 132.6 million Afcan shares on issue, Eldorado will need to distribute some 20.4 million of its own shares to complete the proposed transaction. In the end, Eldorado would have around 296.9 million common shares outstanding.

The deal needs the nod from at least 75% of the votes cast at an Afcan shareholder meeting still to be scheduled. The deal is expected to close by Sept. 23, subject to approval by regulators and Afcan’s shareholders, and also subject to Eldorado’s 30-day confirmatory due diligence study.

The proposed transaction also includes a $2-million break fee payable to Eldorado should Afcan accept a better offer.

Afcan’s key asset is an 85% stake in the Tanjianshan (TJS) gold project in west-central Qinghai province, China.

A bankable feasibility study of the project completed in April boosted the project’s estimated capital cost by about 5% to US$50.2 million. On the flip side, cash operating costs were trimmed by US$7 per oz. to US$226 per oz., and total cash cost by US$18, to US$245 per oz., including a 4.5% royalty that will be split by the company’s Chinese partners.

The project’s pre-tax net present value rings in at US$64.2 million (at a 5% discount); that’s up from US$58.9 million under the previous study. At an internal rate of return of 32% (up from 29%) the project boasts a payback period of 2.6 years. The study employed a gold price of US$420 per oz.

RSG Global pegged TJS’s proven and probable reserves at 6 million tonnes running 4.9 grams gold per tonne, for around 944,000 ounces. The reserves are found in the Jinlonggou and Qinlongtan deposits, both of which remain open along strike and at depth. Jinlonggou has a reserve of 5 million tonnes grading 4.1 grams gold per tonne and Qinlongtan, 1 million tonnes grading 9.1 grams per tonne.

Plans call for an open-pit operation to spit out some 140,000 oz. of gold in its initial year, climbing to 155,000 oz. in year two; total gold production over an 8-year life span is pegged at 842,000 oz., for an average recovery rate of 89%.

Eldorado plans to look at mining Qinlongtan as a shallow underground mine with the aim of reducing waste mining, and providing better access to down-plunge resources. The company also plans to explore targets to the north, east, and south of Jinlonggou, and down-plunge of Qinlongtan.

Afcan has already purchased a semi-autogenous grinding mill, which is currently being refurbished in South Africa. With the main mining and environmental permits in place, the first gold pour is slated for early 2007.

Eldorado’s chief executive Paul Wright says the project’s economics could be further improved through exploration around and along strike of the known deposits, and elsewhere on the 338-sq.-km property. Wright figures the project could be further improved by some engineering enhancements to the latest feasibility study.

Afcan’s stake in the project can be boosted to 90% by spending US$50 million on the project, something expected under the estimates in the latest feasibility study. The local town council and The First Brigade for Geology and Mineral Exploration of Qinghai Province share the balance of the project.

Wright says his company’s combination with Afcan establishes Eldorado as one of the leading participants in the Chinese gold industry, and represents a beginning to Eldorado’s activities in the region.

“We fully expect the acquisition to provide a launching pad for other opportunities elsewhere in China,” he told investors and analysts during a recent conference call.

Looking ahead, Wright says construction at Eldorado’s Kisladag gold mine in Turkey is about 40% complete, with the first gold pour expected by year-end. The company will then shift its focus to Tanjianshan; Efemukuru, elsewhere in Turkey, would follow once permitting is complete.

Eldorado expects the addition of the TJS project to boost its annual gold production to more than 500,000 oz. by 2008.