Agnico bids for Comaplex

Agnico-Eagle Mines’s (AEM-T, AEM-N) latest takeover offer shows the company is keeping a steady eye on future growth even as it continues putting mines into production.

The Toronto-based company, which has been in the midst of one of the most aggressive mine building campaigns of any mid-tier producer over the last two years, is set to add to its stable of sizable gold assets in politically-sound regions by taking hold of Comaplex Minerals’ (CMF-T) Meliadine gold project in Nunavut.

On a conference call held on April 5, Agnico’s chief executive Sean Boyd says the acquisition — which Comaplex management has agreed to and now only needs shareholders’ approval — is about securing continued growth in production beyond 2014.

The agreement in principle between the two companies has Agnico paying 0.1567 of its own shares for each Comaplex share.

Once fully merged, Agnico would then issue Comaplex shareholders one share of a new Comaplex company that would consist of all of the assets not associated with Meliadine. Those assets are mainly made up of oil and gas projects and cash that would give the new company a valuation of $1.00 per share.

The deal offers Comaplex shareholders $9.32 per share for Meliadine and one share worth $1.00 for a total value of $10.32 per share — a 34% premium to the company’s 20- day volume-weighted average share price.

Boyd says that when Agnico’s initial 12.3% stake in Comaplex is taken into account, the company would pay a total of $650 million to acquire Meliadine.

To put it another way, Boyd says Agnico will be giving up 5.6% of its shares to increase its overall gold resources by 17%.

Beyond bolstering resources and securing longer-term production for Agnico, the deal will also clear up a legal squabble between the two companies.

Agnico had filed a suit with the Ontario Securities Commission against Comaplex for issuing 12.75 million of its shares to Perfora Investments without obtaining shareholder approval.

The deal saw Perfora replace Agnico as Comaplex’s largest shareholder.

Comaplex issued the shares to Perfora in exchange for its 22% interest in Meliadine West and its 50% stake in Meliadine East.

The fact that Perfora is offering its support for the Agnico transaction is another signal that the dispute is coming to an end.

Tom Winmill, a portfolio manager with Midas Fund, says despite the suit, Comaplex management deserves credit for addressing the ownership issue, as in doing so it cleared the way for a straightforward valuation of the project — something that allowed the deal to be approved by its board.

Now the deal needs the majority of the minority shareholders’ votes to close in June of this year.

If that happens, Agnico president and chief operating officer Ebe Scherkus says Agnico will complete 100,000 metres of drilling on the project over the first two years.

The size of the drill program is in proportion to Agnico’s high expectations for the project.

While Comaplex evisioned a 3,000-tonne-per-day mill, Agnico sees that as a minimum, with 7,000 tonnes per day being the upper limit.

Supporting the bold ambition is a small but high-grade measured and indicated resource of 12.9 million tonnes grading 7.9 grams gold per tonne for 3.29 million oz. gold, and an inferred resource of 8.4 million tonnes grading 6.4 grams gold for 1.73 million oz. gold.

And Agnico sees considerable upside on the exploration front.

Having been discovered in 1990, the deposit and the area around it still offer blue sky potential.

The land package extends over 650 sq. km of largely unexplored land in a region that Agnico is not only comfortable with, but that also offers synergies for the company.

This familiarity comes from Agnico’s Meadowbank gold mine 300 km northwest of Meliadine. Meadowbank achieved commercial production in March 2010.

“This project is closer to Hudson Bay, and farther south, so they won’t have the logistical issues of Meadowbank,” Winmill of Midas Fund says. “This project should be a real winner with Agnico’s expertise in such hostile environments.”

Specifically, Meliadine sits 25 km north of Ranklin Inlet on Hudson Bay, which will allow Agnico to ship supplies for both mines on large sea-borne vessels to Meliadine first and then on smaller vessels up to Meadowbank.

As for the timing of the deal, Boyd also mentioned Meadowbank as a contributing factor.

He says because Meadowbank came with long-term commitments and contracts, Agnico found itself under pressure from the time it acquired the project. It’s something the company wanted to avoid this time around.

By acquiring Meliadine at this early stage, the project is free from any such commitments.

“Here we have the luxury of moving at our own pace,” Boyd says, “and that is much more attractive to us.”

Boyd says he expects construction of a mine in five years.

In his report, UBS analyst Brian MacArthur reduced his 2010 earnings per share estimate for Agnico slightly to $1.88 from $1.96 to reflect the transaction, but says the project would be marginally accretive to the Agnico’s net asset value.

MacArthur also raised his target price for Agnico to $68 from $66 and maintained his “buy” rating on the stock.

Winmill, which has Comaplex as its largest investment, taking up 4% of the fund, is also bullish on the deal.

Winmill calls the deal a “good one” for Agnico and says the fund would continue to hold shares in the gold producer.

“Agnico has great management,” Winmill says. “They really seem to grasp that the best returns for precious metal investors is to own companies with a strong growth profile and they are lining things up for three to four years out. This is yet another great project on the horizon.”