Great Panther to snatch Cangold for $1.7M

Mexican-focused producer Great Panther Silver (TSX: GPR) is buying Cangold (TSXV: CLD; US-OTC: CGLJF) primarily to get its paws on the Guadalupe de los Reyes (GDLR) gold-silver project in Sinaloa state, in an all-share deal worth $1.7 million.

Under the agreement, Cangold shareholders would receive 0.05 of a Great Panther share for each share held. Great Panther expects to exchange 2.1 million of its shares — reflecting 3% of its current shares — for 42.8 million Cangold shares.

The two companies have an intertwining history, with shared management and directors. Great Panther’s co-founder and CEO, Robert Archer, and former chairman, Kaare Foy, are Cangold’s current CEO and chairman. The two got involved with Cangold around 2001, when it was an inactive shell by the name of First AU Strategies, and reactivated the company by buying the Argosy gold mine in northern Ontario, and subsequently picked up an option agreement on the Thorn gold-silver-copper property in B.C.

Getting little share price traction with those properties, the executives took Cangold to Mexico, where Great Panther was having exploration success. “So out of their offices back in the early 2000s, they had a silver-dominant company looking at silver assets in Mexico for Great Panther Silver, and gold-dominant assets that were coming in as property submissions were being placed into Cangold,” Cangold’s manager of investor relations Erick Bertsch says.

It made sense to keep the two firms separate as shares of primary silver producers were getting a premium over shares of other precious metals firms and gold companies, as silver prices climbed between 2010 and 2012, Bertsch notes. “At that point of time, being a primary silver producer was important.” But with silver prices falling below US$20 per oz., those premiums dwindled. “So, primary silver producers are simply being lumped in with regular precious metals companies … the commodity mix isn’t such a big concern right now for shareholders,” Bertsch says.

Great Panther is debt free and operates the Guanajuato silver-gold mine complex, which includes the San Ignacio satellite mine, in Guanajuato state, and the Topia silver-lead-zinc mine in Durango. It also owns two Mexican exploration projects — El Horcon and Santa Rosa — and has been pursuing acquisition opportunities.

While Cangold’s main asset is its option to acquire a 100% interest in the advanced-stage GDLR project from Vista Gold (TSX: VGZ; NYSE-MKT: VGZ), it has a 100% interest in the Plomo gold project in Sonora and a 100% interest in the past-producing Argosy mine in Ontario.

Cangold signed the GDLR option agreement last April. It needs to pay US$5 million over three years, including US$1 million within the first year to acquire a 70% interest in the property. Cangold could buy the remaining 30% if it makes a positive production decision and forks over US$3 million, plus an escalator payment based on the gold price and the number of measured and indicated gold-equivalent ounces added since the 2013 preliminary economic assessment (PEA).

While the PEA contemplated an open-pit mine at GDLR, producing 35,000 oz. gold and 253,200 oz. silver a year over the first five years of its 11-year life, Cangold is examining the possibility of a combined open-pit and underground mine.

To date, Cangold has paid US$500,000 and extended its remaining US$500,000 payment to March 2, 2015, to assess its financing options.

Considering capital is tough to come by for development-stage projects in the current bear market for mining equities, Cangold was faced with doing a equity financing to pay for the upcoming option payment, as well as fund an infill drill program and a prefeasibility study at GDLR, Bertsch says, adding that the company pegged its capital needs for the year at $1.5 million. With the stock trading at 5¢, Cangold would have had to issue 30 million units, including shares and warrants, to get enough funds for 2015. “It would have been terribly dilutive to the stock and the shareholders,” Bertsch says, noting the firm has nearly 43 million shares outstanding.

Not knowing whether the market conditions would improve in 2015 and beyond, Cangold hunted for a financial partner or suitor to acquire the company late last year.

As part of the search, CEO Archer presented Cangold’s investment case to Great Panther’s independent directors, who believed the junior’s GDLR option could add to their company’s development portfolio. The producer offered to buy out Cangold on Feb. 26.

“While we had a great deal of interest from other groups and parties, nobody was willing to pull the trigger, but Great Panther was,” Bertsch says.

Under the agreement, Great Panther will provide Cangold with a $1.5 million loan to meet its March 2 option payment.

Cangold’s management urges shareholders to approve the transaction, expected to close before the end of May.

Cangold shares closed Feb. 27 at 4.5¢, and Great Panther shares ended at 76¢.