Lake Shore steps into M&A fray with Temex bid

VANCOUVER — Ontario-focused Lake Shore Gold (TSX: LSG; NYSE-MKT: LSG) has been one of the better turnaround stories over the past year, and now the company is looking to grow further. Lake Shore is spending $25 million on exploration this year, and has shifted into merger-and-acquisitions mode with a $24.5-million, all-share bid for explorer Temex Resources (TSXV: TME; US-OTC: TMXRF).

The acquisition would be convenient, as Temex holds a 60% interest in the Whitney gold project under a joint venture with Goldcorp (TSX: G; NYSE: GG), and the property sits next to Lake Shore’s Bell Creek mine and mill.

Whitney hosts 3.2 million measured and indicated tonnes grading 6.85 grams gold per tonne for 708,600 contained oz., and 1 million inferred tonnes of 5.34 grams gold for 170,700 contained oz.

Temex also holds a 100% interest in the Juby gold project in Ontario’s Shining Tree area. Resources at Juby sit at 26.6 million tonnes of 1.28 grams gold for 1.1 million oz. in the indicated category, and 96.2 million tonnes of 0.94 gram gold in inferred.

Under the proposal, Temex shareholders would receive 0.105 of a Lake Shore share, equating to 13¢ per Temex share based on the closing price at the time of the offer. 

Lake Shore president and CEO Anthony Makuch notes that his company has “considerable capacity” at Bell Creek, and that adding a resource of Whitney’s “quality and quantity” would make “a lot of sense.”

But there’s a hurdle in Lake Shore’s path: rival bidder Oban Mining (TSX: OBM). Oban earlier  convinced Temex management to propose a five-way merger to shareholders in early June. The deal has been backed by Sean Roosen and the Osisko Gold Royalties’ (TSX: OR; US-OTC: OKSKF) team, and includes Eagle Hill Exploration (TSXV: EAG; US-OTC: EHECF), Ryan Gold (TSXV: RYG; US-OTC: RYGZF) and Corona Gold (TSX: CRG; US-OTC: CRGAF).

Oban is effectively offering Temex shareholders 0.780 of a share in the newly merged entity, or a 35% premium based on Temex’s 15-day, volume-weighted average share price at the time. 

By comparison, Lake Shore’s is offering a 106% premium relative to the same trading period.

At the time of the Oban offer Temex CEO Ian Campbell said on a conference call that “there was no doubt in our mind that this is exactly the right thing to do, and at the right time. [The move] provides liquidity and capital at a time when it’s extremely scarce.”

But a month later, Temex called the Lake Shore proposal “superior,” and informed Oban that it has 10 business days to increase its offer.

Lake Shore has invested $350 million in the Timmins gold camp over the past three years, and has dropped its operating costs and boosted cash margins.

The company reported cash and bullion valued at $82 million in early July, and expects all-in sustaining costs should be below US$950 per oz. this year. Over the past six months Lake Shore cranked out 95,600 oz. and boosted its annual guidance to between 170,000 and 180,000 oz. gold.

The knock against the company, however, has always been a relatively short mine life at Bell Creek and the nearby Timmins West mine. 

Proven and probable reserves at Bell Creek total 1.8 million tonnes of 4.6 grams gold for 263,600 contained oz., while Timmins West hosts 3.7 million probable tonnes averaging 4.3 grams gold for 510,000 contained oz.

The company has measured and indicated resources across its Timmins complex at the Vogel, Marlhill and Gold River targets.

Lake Shore has had recent exploration success at its 144 target area, where it hailed a second gold discovery in late June. The company recently tabled intercepts from the newly identified 144 Gap Southwest zone, which were highlighted by 41 metres of 3.3 grams gold in hole 15-115 and 14 metres of 3.22 grams gold in hole 15-125.

The new interpretation is that 144 Gap mineralization is contained within a broad zone of hydrothermal alteration and deformation measuring up to 100 metres wide, and is closely associated with syenite intrusions, quartz veining, pyrite, scheelite and/or galena, and multiple occurrences of visible gold.

BMO Capital Markets analyst Brian Quast questions whether Lake Shore might be better served focusing on its internal asset base, versus wading into the acquisition market. BMO Research has a stock “underperform” rating on the company, along with a $1.15-per-share price target.

“About [$24 million] in Lake Shore shares is unlikely to make a material difference in estimates,” Quast noted on July 16. “Also, the addition of near-mill ounces at Bell Creek makes sense from an operational perspective. However, it would seem that [the capital] could be used to further develop the current [mine,] just as easily as buying nearby properties, in BMO’s view.”

Lake Shore has traded within a 52-week window of 70¢ to $1.40, and jumped 41%, or 35¢ over the past six months, en route to a $1.21-per-share close at press time. The company has 436 million shares outstanding for a $502-million market capitalization. 

Shares of Temex soared 110% after the offer en route to an 11.5¢ close at press time. The company has moved within a 52-week trading range of 4¢ to 12¢, and has 187 million shares outstanding for a $23.4-million market capitalization.

Oban had not yet responded to the lake Shore bid at press time.