Endeavour Mining to merge with Adamus

Canada’s Endeavour Mining (EDV-T)  and Australia’s Adamus Resources (ADU-V, ADU-A) are planning to merge and create a “growth-focused West African gold producer” with pro forma production this year of about 170,000 oz. gold from two mines, one in Burkina Faso and the other in Ghana.

Endeavour owns the Youga gold mine in Burkina Faso and a pipeline of exploration and development projects in West Africa. It also owns the Agbaou feasibility stage project, one of the largest undeveloped gold deposits in Côte d’Ivoire. A construction decision on Agbaou is expected in the first quarter of next year. Endeavour also has a 40% interest in the permitting-stage Finkolo joint-venture gold project in Mali and a 38.5% interest in Namibia Rare Earths, which owns the Lofdal rare earth project in Namibia.

Adamus produced its first gold in January and commercial production began in April at its 90%-owned Nzema gold project in Ghana. (The Ghanaian government owns the remainder.) The Nzema project spans 665 sq. km in the country’s Ashanti gold belt.

Reserves at Nzema currently stand at 1.1 million oz. gold, derived from resources of 2.1 million ounces, “sufficient to sustain output of 100,000 oz. per year for over ten years from oxide material,” UBS Investment Research wrote in a note to clients in late July, adding that “potential exists for production to be expanded through the development of sulphide gold resources beneath the current pit designs.”

In addition, Adamus is one of the largest exploration property holders in Liberia, with 3,107 sq. km.

If the proposed merger is approved, the new entity could have a production rate of about 250,000 oz. gold a year by the end of 2013 from existing assets, including the Agbaou project, Endeavour says. Cash costs per oz. from the Youga and Nzema gold mines in 2011 are estimated at US$575-US$625, excluding royalties, refining, freight and non-cash adjustments.

Under the all-stock transaction, Adamus shareholders would receive 0.285 of an Endeavour share for each Adamus share held. The exchange ratio was calculated using the ratio of Endeavour’s and Adamus’ volume weighted average trading prices over the 20 trading days ending on Aug. 19.  

On a fully-diluted basis, Endeavour and Adamus shareholders would own about 55% and 45%, respectively, of the merged entity’s issued shares.

Endeavour will also invest a minimum of US$160 million from its current cash balance to relieve the constraints of Adamus’ Nzema project finance structure, including repayment of the US$60-million project loan and at least US$100 million towards reducing the volume of the company’s hedged gold.

Endeavour notes in a press release that the pro forma financial strength of the merged entity will total US$516 million from several sources: Endeavour’s US$195 million cash and marketable securities; Adamus’ US$21 million cash; a new, undrawn, credit-approved US$200-million revolving corporate loan facility provided by Unicredit Bank; and about US$100 million from any future exercise of all Endeavour options and warrants with an exercise price of $2.50 or less.

Neil Woodyer of Endeavour would serve as the company’s CEO and Mark Connelly of Adamus Resources its chief operating officer. Management will be led from Perth, Australia.

Both companies’ boards have unanimously recommended the merger to their shareholders.

In a statement Connelly described the merger as combining “our proven mine development skills and materially enhanced financial flexibility from Endeavour,” and enabling “accelerated growth through the combined portfolio of development exploration projects.”

Endeavour’s Woodyer argued the merger would create a “stronger and better positioned company with the financial strength to grow through strategic acquisitions.” He also noted that Endeavour’s “financial strength will unlock value and increase operating flexibility through our ability to repay the Nzema project finance facility, significantly reduce Nzema’s gold hedge and fully fund development of Agbaou.”

The merger still needs approval from the Australian Foreign Investment Review Board, as well as from the ASX and the TSX. If it succeeds, Endeavour plans to list its shares in Australia.

Shareholder meetings at both companies are scheduled for November and the merger is expected to be implemented by December.

A lot can happen between now and November. In a research note on June 7, before the proposed merger between Endeavour and Adamus was made public, Christopher Ecclestone of Hallgarten & Co. in New York noted that there was “a host of potential fins in the water as Adamus moves into production” with the “most-likely predators” being Golden Star Resources (GSC-T, GSS-X), Keegan Resources (KGN-T, KGN-X), Semafo (SMF-T) and AngloGold Ashanti (AU-N).

In Toronto, the merger news sent Endeavour shares up 13¢ or 5.3% to close at $2.53 per share with 1.1 million shares traded. In Australia at presstime, Adamus was trading at 71¢ per share.