Buffalo Gold plans merger with Sargold

After backing out of a similar proposed acquisition of Dynasty Gold (DYG-V) earlier this year, Buffalo Gold (BUF.U-V) is targeting another company it believes could help it make the transition from gold explorer to a producer of the yellow metal – Sargold Resource (SRG-V).

A letter of intent between the companies has Buffalo offering one share, warrant or option for every 3.5 similar units of Sargold, which has a 90% stake in a past-producing Italian gold property. Based on the price of both companies on July 11, two days before the deal was announced, the deal represents an 80% premium for Sargolds shares.

Sargold shareholders would hold about 25% of the merged company.

Sargold launched small-scale production at its Furtei processing plant, on the island of Sardinia, in Italy, this year, pouring its first gold dore bar in March. The company used upgraded ore from the residual heap-leach pad at the Furtei mine, which produced 135,000 oz. gold from 1996-2002.

But Sargold has bigger plans for the mine, even though it has not completed a feasility study. It plans to start mining the Sa Perrima copper-gold zone at the Furtei mine within six months, producing 15,000-20,000 oz. gold in its first year, ramping up to 60,000-70,000 oz. gold equivalent in its second year, and then maintaining production of about 50,000 oz. gold equivalent for at least five years.

The Furtei property also has exploration potential, with several targets identified. In addition, Sargold has a 90% stake in the Monte Ollasteddu and Osilo gold properties, also in Sardinia, as well as the Lodestone iron property in British Columbia.

Buffalos growth strategy includes both exploration at its Mt. Kare gold project, in Papua New Guinea — where it has delineated an indicated resource of 1.4 million oz. gold — and acquiring advanced projects that will help it achieve production in the near future.

The Vancouver-based company terminated its proposed acquisition of Dynasty Gold in April, deciding that the juniors properties, in China, were not close enough to production. Buffalo chairman Damien Reynolds commented at the time that the projects would require a bigger time commitment than fits our current strategy.

Only last week, Buffalo made another major investment, buying into junior Kinbauri Gold (KNB-V) with a 25% shareholding. Kinbauri holds projects in Quebec, Ontario and Nevada, as well as Spain, including the recently acquired El Valle and Carles past-producing properties and the La Brueva and Godan exploration properties in the Rio Narcea gold belt.

Under the Sargold deal, either company could be liable for a $1-million break fee if the deal is not completed, under certain circumstances. The proposal is subject to the negotiation of a definitive agreement and regulatory approvals.

Sargold will hold a shareholder meeting to vote on the deal before the end of October.

Buffalo Gold shares were up 8 on the news to $1.09; the stock has traded in a 52-week window of 75-$2.87. Shares in Sargold were up 6, or more than 30%, to 25, having trading in a 52-week range of 17-32.