Buffalo Gold wants Sargold in herd

After backing out of a similar proposed acquisition of Dynasty Gold (DYG-V, DGDCF-O) earlier this year, Buffalo Gold (BUF.U-V, BYBUF-O) 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, SRGOF-O).

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 prices of both companies on July 11, two days before the proposed merger was announced, the deal represents an 80% premium for Sargold’s shares.

Shareholders of the Vancouver-based junior would hold about 25% of the merged company.

Sargold launched small-scale production at its Furtei processing plant, on the Italian island of Sardinia, this year, pouring its first gold dor 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 inside six months, producing 15,000-20,000 oz. gold in the first year, ramping up to 60,000-70,000 oz. gold equivalent in the 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.

Buffalo’s 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, the company says, in the near future.

The Vancouver-based company quashed its bid for Dynasty Gold in April, deciding that the junior’s Chinese properties were not close enough to production. Buffalo chairman Damien Reynolds said at the time that the projects would require “a bigger time commitment than fits our current strategy.”

Just a week before the Sargold merger was announced, Buffalo made another major investment, buying into junior Kinbauri Gold with a 25% interest. Kinbauri holds projects in Quebec, Ontario and Nevada, as well as Spain, including the recently acquired El Valle and Carles past-producing projects and the La Brueva and Godan properties in the Rio Narcea gold belt.

Under the Buffalo-Sargold deal, either company could be on the hook 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, as well as the support of Sargold shareholders, who are expected 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 traded in a 52-week range of 17-32.