Argonaut Gold to merge with Alio Gold in all-share deal

Argonaut Gold (TSX: AR) and Alio Gold (TSX: ALO; NYSE-A: ALO) announced a friendly all-share at-market merger that will create a larger company with a production base of over 235,000 gold-equivalent oz. this year.

Under a definitive agreement approved by the boards of both companies, each Alio common share will be exchanged for 0.67 of an Argonaut common share, giving Argonaut and Alio shareholders 76% and 24% ownership of the combined company, respectively. The exchange ratio was based on the volume weighted average prices of each company’s common shares over the 20 trading days ended March 27.

“Both companies are excited to come together” and “build a North American intermediate gold producer with a strong development pipeline,” Peter Dougherty, Argonaut’s president and CEO, said on a conference call.

“For Argonaut, our long-term strategy since founding the company has always been to create a 300,000-500,000 oz. a year producer,” he continued. “This transaction is another step in that direction. We have a strong history of acquiring simple, low-risk projects, bringing our operating expertise and maximizing the potential of those projects, extending mine life through exploration and creating sustainable environmental and community values. This merger is right in line with our strategy.”

Argonaut’s principal assets are its 100%-owned El Castillo and San Agustin mines, which together form the El Castillo complex in Mexico’s Durango state, and its 100%-owned La Colorada mine in Mexico’s Sonora state. It also owns two advanced-stage projects: Cerro del Gallo in Guanajuato, Mexico, and Magino in Ontario.

Alio Gold’s flagship asset is its open-pit heap leach Florida Canyon mine, 64 km southwest of Winnemucca, Nev. and not far from Argonaut’s head office in Reno. Alio also owns the Ana Paula development project in Mexico’s Guerrero state, 180 km from Mexico City. Ana Paula is at the prefeasibility stage and is envisioned as an open pit heap leach mine.

The Florida Canyon mine adds immediate growth for Argonaut, and will replace production from its El Castillo mine, which is expected to close in 2022.

“At Argonaut, we have a proven track record of operating profitably open-pit heap leach mines over the past decade, and believe Florida Canyon is an open-pit heap-leach mine starting to achieve significant positive momentum,” Dougherty told analysts and investors on the conference call.

Drill core at Alio Gold’s Ana Paula gold project in Mexico. Credit: Alio Gold.

The new Argonaut will have a strong balance sheet with US$55 million in cash and over US$30 million available from its existing credit facility, and a market capitalization north of $250 million, Dougherty added. Production of 235,000 oz. a year will drive operating cash flow to nearly $90 million, he said, and the new company will boast mineral reserves of nearly 7 million oz. gold and measured and indicated resources of over 13 million ounces.

Mark Backens, president and CEO of Alio Gold, noted the deal “makes lots of sense” for the shareholders of both companies.

“By combining the two companies, Alio immediately gains operational diversification while removing much risk that is inherent to a single mine company,” he said on the conference call. “This combination significantly improves the cash flow profile, and together our companies provide an actionable, strong development pipeline. The benefit of this combination provides Alio shareholders a lower cost of capital, as evidence in the difference in borrowing rates of the two companies. At Alio, debt currently carries a 10% coupon as compared to Argonaut’s existing revolver, which carries a coupon of Libor plus 2.25%.”

In a research note to clients, Ryan Hanley of Laurentian Bank Securities, said the merger values Alio at $61 million based on the company’s closing share price on March 27, and noted that Alio’s Florida Canyon mine “fits well into Argonaut’s portfolio and should benefit from the combined company’s much stronger balance sheet and Argonaut’s experience in running similar operations.”

“Although Florida Canyon’s reserve grade of 0.37 gram gold per tonne might cause some concern, it is important to note that Argonaut has been successful at profitably running similar operations. (The current reserve grade for the El Castillo complex is 0.32 g/t). We believe that if there is a company that is able to operate Florida Canyon profitably, Argonaut is likely that company.”

The mining analyst also noted that “prior operators of Florida Canyon were dealing with stretched balance sheets, which resulted in various challenges including poor equipment availability and short cycling on the leach pad (i.e. ore place on the pad was not leached for a sufficient period before additional ore was stacked) … [and] with the addition of a new fleet of equipment at the end of 2019, that start-up of a second leach pad in Q2/20, and the additional financial flexibility provided by Argonaut’s balance sheet, operations at Florida Canyon should begin to improve –particularly in H2/20.”

Alio Gold acquired Florida Canyon under an agreement with Rye Patch Gold in May 2018. The mine was initially put into production in 1986 and restarted in April 2017. According to its website, Alio expects the mine will produce between 60,000 and 70,000 oz. gold this year at cash costs of between US$975 and US$1,075 per ounce.

Brian Quast of BMO Capital Markets models a nine-year mine life for Florida Canyon “with average production of ~70,000 oz. per annum and co-product all-in sustaining costs of US$1,127 per oz.”

The mining analyst also values Alio Gold’s Ana Paula development project at about US$22 million on an in situ basis.

The transaction is expected to close in the second quarter of the year.