Nescor to join forces with Armada

Deal-maker Robert Friedland has struck again, this time combining an asset from a private company with one owned by Armada Gold (ASE).

The result?

A copper-gold mining company based in Central Asia.

Armada and privately owned Nescor Energy will each hold a 50% interest in the new entity. Friedland, who will become a director of the new company, is a shareholder of Nescor.

Armada’s principal contribution to the new company is its 69.3% net attributable interest in the Baley gold project in the Chita region of southeastern Russia. The project includes the Taseevskoe, Sredney-Golgotoy and Verchny-Aliinskoe licences, which comprise 3,200 acres and include reserves in two past-producing gold mines and two tailings dams.

Nescor will contribute its 49% interest in a joint-venture company that processes waste dumps from the Erdenet porphyry copper mine in northern Mongolia. The Erdenet mine ranks among the top 10 copper producers in the world, with reserves in the order of 2 billion tons averaging 0.7% copper and 0.02% molybdenum.

The company is constructing a solvent extraction-electrowinning plant to process the waste dumps, which are estimated to contain more than 1 billion lb. copper.

The plant is expected to be up and running in July, and, according to Armada management, will produce 11 tons of copper per day, generating a cash flow of US$5-6 million per year. Within two years, modifications to the plant are expected to boost daily copper production to 120 tons. The average cash operating cost will be US30 cents per lb., and there is sufficient material in the waste dumps to support 40 additional years of processing.

Nescor’s other assets, including its oil and gas interests, are not included in the deal.

“This is a great deal for Armada and makes them look a little more serious,” explains Michael Fowler, a gold analyst with Levesque Beaubien Geoffrion.

According to Armada President Derek Fisher, the combination is a good fit for Armada. “Because the projects are fewer than 240 miles apart, we can streamline the management and make the operations more efficient. At the same time, we’ve pushed out beyond Russia and reduced our political risk.” Fisher and Armada’s chairman, John Hopkins, will retain primary responsibility for the Russian venture, while Fisher, Hopkins and Nescor Chairman Neil Salsich will be responsible for projects in Mongolia.

The cash flow generated from the copper-processing operation will be used to prove up reserves at Baley. “We plan to proceed at full speed with the bankable feasibility study and develop a mine at the project as soon as possible,” stresses Hopkins.

A preliminary feasibility study of the Taseevskoe licence indicates the Taseevskoe I and III deposits contain underground reserves of 7.7 million oz. Total resources for all three licences exceed 8.8 million oz.

The study suggests a large open-pit operation centred on the Taseevskoe I and III deposits could be mined at a rate of 5.5 million tons per year to yield 470,000 oz. at a cash cost of US$147 per oz.

Total minable reserves in the proposed open pit are estimated at 60.5 million tons averaging 0.1 oz. per ton.

“We expect the bankable feasibility study to be completed by September,” says Hopkins. If the study is positive, Baley could begin producing gold within 30 months. Moreover, Hopkins states, “cash flow derived from the copper project would become available during Baley’s critical financing and development stages.”

According to Hopkins, Armada will derive other benefits from its association with Nescor and Nescor’s most notable shareholder, Friedland. “We believe Robert Friedland’s association signals support for the project, and our new investors [that is, Nescor’s private shareholders] will strengthen our presence in the market and help us raise additional funds.”

The business combination is subject to regulatory and shareholder approval, as well as due diligence.

This is Friedland’s second foray into Russia in the past three months. Earlier this year, a group of investors — including Friedland, Indonesian businessman Johannes Kotjo and associates Bambang Trihatmodjo and Tan Sri Azmi Wan Hamzah — purchased a 19.9% interest in London-based Bakyrchik Gold for L11.4 million.

The investors also hold warrants that, if exercised, would increase their stake to 29.9%.

Bakyrchik is earning a 40% interest in the Bakyrchik gold deposit in Kazakhstan, which has proven and probable reserves of 6 million oz. and may contain as much as 15 million oz. in situ.