Linear Gold And Central Sun Mining To Wed

With the well of money run dry, the mining industry is likely to witness a few marriages of convenience in the months ahead, like the proposed coupling of Linear Gold (LRR-T, LGCFF-O) and Central Sun Mining (CSM-T, SMC-X) announced on Dec. 29.

Central Sun could hardly reject Linear’s advances. In mid-October, a US$22.5-million financing deal fell through, forcing the Toronto-based company to suspend plans to install a new milling operation at its Orosi gold mine in Nicaragua, which it is converting from a heap leach to conventional leach circuit.

If the companies succeed in making it to the altar, Central Sun will get its hands on about US$20 million in cash and equivalents, which will be used to restart production at Orosi. The project, about 50% complete, was put on hold after the bottom fell out of the capital markets.

At the same time, Linear, which is exploring for gold and base metal deposits through joint ventures with Kinross Gold (K-T, KGC-N) in Mexico and Everton Resources (EVR-V, EVRRF-O) in the Dominican Republic, will inherit a portfolio of producing gold mines in Nicaragua.

These include Central Sun’s Limon underground mine and 1,000-tonne-per-day mill, about 100 km north of the Nicaraguan capital of Managua, which is currently producing about 45,000 oz. gold a year, and the Orosi open-pit mine, 110 km east of Managua.

Once the new mill is installed at Orosi, the mine will produce about 85,000 oz. gold annually and lift Linear’s total gold production to about 130,000 oz. a year. Linear will also get access to Central Sun’s prospective Mestiza-La India property, 70 km by road east of the Limon mine, a potential high-grade development opportunity.

“It’s a marriage of complementary skill sets and attractive assets in both companies,” Wade Dawe, president and chief executive of Linear Gold told investors and analysts on a conference call Jan. 6.

Central Sun receives more than just cash from the deal, however. Linear Gold has some promising assets of its own, including the Ixhuatan gold project in Mexico and the Ampliacion Pueblo Viejo, Loma El Mate and Loma Hueca gold properties in the Dominican Republic.

Kinross Gold has been exploring and evaluating Linear’s Ixhuatan gold project under an option agreement to acquire up to a 70% interest, in exchange for future cash payments to Linear of up to US$115 million.

The merger would create a gold producer with initial production of 45,000 oz. gold per year increasing to 130,000 oz. gold following the installation of the Orosi mill this year, and a starting cash balance of about US$21 million.

The transaction will give Central Sun the “financial muscle” it needs, Stan Bharti, the company’s chairman, declared on the conference call.

Not only will the combined company have a strong balance sheet, (although it will still need to raise about US$7 million through debt financing to put Orosi back in operation by the end of 2009), but it will also have excellent management, a good capital structure with about 53.1 million shares outstanding, and excellent assets, Bharti said.

“In this market, we have production and this production allows us to play the consolidation game,” he explained. “Gold is poised for a huge uptick here and the companies that are going to get the most benefit out of that are producers. We want to be an intermediate gold producer in the next twenty-four months.”

Under a letter of agreement made public on Dec. 29, the deal calls for each Central Sun share to be exchanged for 0.4 of a Linear Gold share. For Central Sun, the exchange ratio values it at about $18.4 million, or about 29.2¢ per share.

That valuation represents a 75% premium based on the 20-day volume- weighted average price of both companies’ shares on the Toronto Stock Exchange on Dec. 23, the trading day prior to the announcement, and a 42% premium based on their respective closing prices on Dec. 23.

Linear Gold will have about 53.2 million shares issued and outstanding, with former Central Sun shareholders holding roughly 48% of the shares of the combined company.

So far, Linear has lock-up agreements with Central Sun’s officers, directors and shareholders representing about 10.5% of the company’s shares.

At presstime, Central Sun Mining was trading at 45¢ per share. Over the last year, its shares have traded between 7.5¢ and $2.50.

Linear Gold traded at $1.05 per share in a 52 week band of 65¢-$3.10.