Premier Gold takes out Hardrock JV partner

Ewan Downie’s Premier Gold Mines (PG-T) has decided to take full control of the Hardrock gold project near Geraldton in northwestern Ontario, in which it currently owns a 70% interest. The company will acquire the remaining 30% by taking over joint venture partner Goldstone Resources (GRC-T), having agreed to pay 0.16 of a Premier share plus 0.01¢ in cash for each of Goldstone’s 110 million shares outstanding on a fully diluted basis.

After completing a major drilling program totalling 114,000 metres in 2010, Premier updated the resource estimate for Hardrock this spring, resulting in a 269% jump for measured and indicated resources to 2.5 million oz. gold. The 15-km-long property package, comprising several historic mines in the Beardmore-Geraldton greenstone belt which produced over 3 million oz. gold from 1938 to 1968, now boasts 11 identified mineralized domains in both open pit and underground forms.

Along with full control of the Hardrock project, Premier will gain the rest of Goldstone’s extensive property holdings in the Beardmore-Geraldton greenstone belt. This principally includes: the underground Brookbank deposit, approximately 50 km west of Hardrock, which hosts indicated resources of 424,400 oz. (at a grade of 9.7 grams gold) and 276,600 inferred oz. (at a grade of 7.9 grams gold); the Key Lake project, 10 km southwest of Brookbank, where recent drilling by Goldstone returned significant intercepts such as 44 metres grading 3.17 grams gold; and the historic Leitch gold mine, 5 km north of Key Lake, which produced almost one million oz. gold at an average grade of 31.5 grams gold during its lifetime.

Under the terms of the transaction, Premier will issue up to 17.6 million shares to Goldstone shareholders worth approximately $92.6 million given Premier’s closing price prior to announcing the deal, or roughly 14% of Premier’s outstanding shares on a fully diluted basis. Including both the Hardrock and Brookbank resources attributable to Goldstone, Premier’s acquisition cost per gold oz. is approximately $52 per oz., a fairly decent price when compared with other recent acquisitions in the gold sector. According to a study by the Toronto private investment bank IBK Capital, $71 per gold resource oz. for exploration assets was the average price paid over 66 deals completed in 2010, while an average of $207 per oz. was paid for producing assets. The price is not so attractive however, when compared with 2009 levels ($29 per oz. for exploration assets and $89 per oz. for producing assets), though the price of gold was considerably cheaper then.

Goldstone shareholders stand to receive a 27.3% premium based on each company’s 30-day volume-weighted average price, with both boards of directors unanimously approving the transaction. Notwithstanding the premium, at roughly 85¢ a share the deal still values Goldstone shares at a price significantly lower than its 52-week high reached in November 2010, when the shares traded as high as $1.20.

Goldstone’s chairman, interim CEO and largest shareholder, Philip Cunningham, seems happy enough with the deal; he has pledged his 12.2 million shares worth roughly $10.3 million on paper in support of the takeover. He bought most of the shares between 2004 and 2008 at prices ranging from 5¢ to 17¢, though these were rolled back 1:3.75 in early 2010 following the merger of his Roxmark Mines with Ontex Resources to create Goldstone. This left him in control of roughly 10 million shares acquired at an average postrollback price of around 40¢.

Goldstone suffered from serious staffing problems in 2010, having fired former CEO Patrick Sheridan and chief operating officer Gary Conn after Cunningham took control of the board by requisitioning a meeting of shareholders (the incumbent directors resigned, however, before the meeting took place). Several of Goldstone’s site geologists resigned in the midst of the change of control and its vice-president of exploration resigned a few months later, while COO Conn ended up suing the company for wrongful dismissal (the company denies the claim).

Premier originally optioned into the Hardrock joint venture with Goldstone’s predecessor Roxmark in late 2007, agreeing to pay $750,000 cash, issuing 400,000 shares and spending a minimum of $7 million on exploration over four years.  It has already more than met its exploration requirements, and currently has eight drill rigs active on the Hardrock property completing 70,000 metres of drilling in 2011.

Of the most lauded characteristics of the Hardrock property, its favourable location and safe jurisdiction might be mentioned the most. The Trans-Canada Highway, Trans-Canada pipeline and major power lines all run through the centre of the property, providing several development advantages near mining-friendly towns.

In the potential open-pit portion of Hardrock, measured and indicated resources total 18.2 million tonnes grading 1.85 grams gold per tonne, using a cutoff grade of 0.5 gram gold. Adding another 937,000 inferred tonnes at the same grade brings the total contained gold oz. up to 1.13 million oz.

The underground portion holds measured and indicated resources at a 2-gram-gold cutoff totalling 12.85 million tonnes grading 4.57 grams gold for 1.89 million oz contained gold. Inferred resources tally 9.15 million tonnes at 4.41 grams gold for an additional 1.3 million oz. contained gold. The underground resources are located close to and below the historic mine workings, which were primarily within 600 metres of surface. One of the new zones delineated last year, for example, is actually an old zone left unmined by a past operator in the early 1960s. Drilling there recently turned up a remarkable 114.5 metres of 7.92 grams per tonne gold.

Premier is simultaneously advancing several other properties, most notably the Rahill-Bonanza gold project in the Red Lake area of Ontario, a 49%-51% joint venture with project operator Goldcorp (g-t, gg-n). The property sits between Goldcorp’s cornerstone Red Lake Gold Mines complex and its nearby Cochenour mine, for which Goldcorp is building a high-speed underground tram expected to partially pass through the Rahill-Bonanza project. The International Speculator newsletter, run by the Casey Research Group, even suggests Premier is itself a takeover target due to Rahill-Bonanza’s prime location near Goldcorp’s operations.

Premier’s president Downie unsurprisingly had only nice things to say about the company’s proposed acquisition in a prepared statement to shareholders. “This acquisition will secure for Premier 100-per-cent ownership of one of Canada’s fastest-growing gold deposits. Our substantial combined land holdings in the district provide an excellent opportunity to define multiple deposits with considerable production potential in addition to terrific exploration opportunities in this re-emerging gold camp.”

He also provided more enticing evidence of his thoughts on the acquisition through filings on SEDI of recent share purchases. He has bought 37,000 shares in the past two months at prices ranging from $5.08 to $6.20, bringing his total shareholdings up to 2.65 million shares.

As president and a large shareholder of Wolfden Resources from around 1999 to 2007, Downie led the Nunavut-focused mineral explorer to a takeover by Australian zinc miner Zinifex for $3.81 a share. As a condition of the deal, however, Wolfden first spun out its gold assets into a new company, Premier Gold, leading to his current position.

Shareholders of Premier reacted positively to the takeover announcement on June 22, pushing the stock up 17¢ to $5.42 on 1.1 million shares traded.