Yes Virginia, there is a Santa Claus (December 05, 2005)

Just five weeks after agreeing to buy the major Canadian assets of Placer Dome (PDG-T, PDG-N) for $1.35 billion in cash, Goldcorp (G-T, GG-N) has added Virginia Gold Mines (VIA-T) to its Christmas shopping list.

In the latest deal, Goldcorp plans to buy the Quebec City-based explorer via an all-stock deal worth more than $500 million. Key to the deal is Virginia’s expanding lonore gold discovery in the James Bay region of Quebec.

Under the proposed deal, Virginia shareholders would receive 0.4 of a Goldcorp share for each share tendered. They would also get half a share in a new public exploration vehicle, New Virginia, with each of those shares estimated to be worth $1.23, based on the fair market value of the assets and cash it would hold.

Goldcorp would issue some 19.6 million shares to Virginia shareholders, or about 5% of its outstanding shares.

Goldcorp says the total consideration received by Virginia shareholders under its bid represents a premium of around 43%, based on each company’s 10-day weighted average trading price prior to the deal’s announcement on Dec. 5. Goldcorp also says its takeover bid values lonore alone at US$420 million.

New Virginia will inherit all of Virginia’s remaining exploration assets in addition to a 2% sliding-scale net smelter return royalty on all production from the lonore property. The royalty increases for each million ounces produced in excess of 3 million ounces.

The new company will also have $31 million in cash plus all funds from generated by the exercise of Virginia’s options and warrants before the deal’s closing.

The agreement also provides for an advance royalty of US$100,000 per month payable to New Virginia, if the lonore property is not in commercial production 37 months after closing.

On the flip side, Virginia has agreed to pay a termination fee equal to 4% of its market value of $382 million, or $15.3 million, should the transaction fail under certain circumstances.

“We honestly believe that we have just acquired the core of the best new Canadian gold discovery since Hemlo,” said Goldcorp’s director of project development Randy Smallwood during a conference call with analysts.

“We, along with a lot of other people in this industry, have been following Virginia very closely for the last couple of years, especially in the last year.”

The lonore project is centred on the Roberto mineralized system, which has been traced over a lateral distance of more than 1.9 km and to a vertical depth of 900 metres, remaining open in all directions. The Roberto system comprises the Roberto, Mid-Roberto and Roberto Est mineralized zones — a series of steeply dipping, sub-parallel zones hosted in a strongly altered sedimentary package. The zones are part of a replacement-style system of en echelon lenses.

Work on the periphery of the Roberto system has also outlined the emergence of new gold-bearing quartz zones often containing visible gold.

The latest batch of holes from lonore confirmed the Roberto system to a depth of 900 metres. The results also include the best ever intersection from the Roberto zone, with a 15-metre interval running 22.6 grams gold per tonne.

Goldcorp said in a prepared statement that more than 70% of the 212 drill holes sunk on the property so far have yielded assay results exceeding 10 grams gold.

Smallwood says Goldcorp plans on advancing lonore as rapidly as possible. “It’s an attractive time in the gold industry with commodity prices moving as they are, and we want to make sure we take advantage of as much of this as we can.”

He says resource and scoping studies will begin early next year, and environmental baseline studies already initiated by Virginia will be expanded. Plans call for the release of an initial resource estimate during the first half of 2006. The results of the scoping study are also due out by mid-2006, followed by those of a feasibility study a year later.

Virginia had planned on releasing its own resource estimate in December. Many analysts figure the Roberto zones currently contain somewhere between 3 million and 3.5 million oz. of gold.

Says Smallwood: “We’ve worked our way through this deposit during our due diligence and came up with an estimate that compares favourably with what a lot of the analysts reports have out there, but I can’t give you a physical number.”

lonore is initially envisaged as a starter pit operating at 3,000 to 4,000 tonnes per day for the first 3 or 4 years; the operation would move gradually underground. Smallwood expects that cash costs should come in better than other Canadian operations owing to the thickness and continuity of the zones. Underground mining costs would be in the ballpark of $25 per tonne.

When asked why he was selling now, before it was known what exactly was being sold in that the zones remain open, Gaumond responded that the deposit had been discovered 15 months ago and during that time Virginia had created significant shareholder value.

He explained that the deal allows for the crystallization of a large portion of that value while permitting shareholders to retain leverage in lonore through the royalty. He says the stake in Goldcorp will also allow shareholders to benefit from the development of the project.

“We are rewarding shareholders with what we have discovered so far and still giving them leverage for the future. It was definitely not premature,” Gaumond says of the agreement.

Indeed, Gaumond says the timing was perfect; the project has reached the development stage and requires financial and prefeasibility studies, areas he admits are “definitely not our world of expertise.” “We are explorers, strictly explorers.”

While Gaumond would not name or confirm if there were any other bidders, he said that as lonore is the most exciting gold discovery in Canada, it is no secret that there was a lot of interest.

“All of us at Virginia wanted to see Eleonore developed by a qualified and experienced mine development team and Goldcorp with their Canadian expertise is without any doubt one of the best in the industry,” said Gaumond in a prepared statement.

With the creation of New Virginia, Gaumond says the focus now is to find the next lonore.

“Our primary skill set is generative exploration and we will now have the largest treasury in our history as well as cash flow without any capital commitment with which to explore.”

“We will continue to do what we do best early stage exploration in northern Quebec,” he concluded.

In connection with the agreement, Goldcorp also has the right to subscribe for up to 5% of New Virginia’s common shares, with warrants good for another 2%. Gaumond says New Virginia will start off with about 25 million shares outstanding.

The plan requires the approval of at least two thirds of Virginia shareholders; a vote is slated for early January. The support of Virginia’s officers and directors has been locked up. Goldcorp shareholder approval is not required. The deal is also subject to regulatory approval. The companies hope to sign a definitive agreement as soon as possible thereafter.

News of Goldcorp’s friendly bid sent shares in Virginia as much as $2.33, or 28%, higher to $10.63 in early trading in Toronto on Dec. 5; the shares ended $2 better at an all-time high of $10.30. For its part, Goldcorp lost 20 to $23.58.

Discussions aimed at listing New Virginia shares for trading on the Toronto Stock Exchange have already begun.