With gold equities having underperformed for more than a year despite the gold price hitting a series of new all-time highs, many analysts have predicted a fresh wave of M&A activity for the gold sector in 2012, arguing it represents one of the cheaper ways companies can now quickly acquire new ounces.
Nevertheless, shareholders’ initial knee-jerk reaction to Elgin Mining‘s (ELG-V) all-share takeover bid on Feb. 1 for established junior gold miner Gold-Ore Resources (GOZ-T) puts that theory to the test, with Elgin shares down 19% or 24¢ to $1.00 in mid-morning trading.
Elgin has agreed to issue 85 million new shares to existing Gold-Ore shareholders in a one-for-one deal that values its target at $103-million or $1.22 a share. It represents a 66% premium to Gold-Ore’s closing price of 75¢ prior to the offer and is nearly 10 times the company’s net earnings last year. Gold-Ore, with its low-grade, high-cost Bjorkdal gold mine in Sweden, earned $10.2 million in 2011 on production of 40,338 oz. gold. This was up from $6.7 million in 2010 on production of 41,051 oz. Taking into account Bjorkdal’s 1.5 million oz. in measured, indicated and inferred gold resources, as well as 166,000 oz. in proven and probable gold reserves, Elgin is paying around $60 an oz for the deposit and mine infrastructure.
As Patrick Downey, Elgin’s president and CEO, explained in a conference call and press release about the offer, “We see this as our first stage of growth: it expands our team, it maintains our low-risk profile, and it gives us the financial leverage and muscle to accelerate our growth plan as we go forward… Gold-Ore’s Bjorkdal mine will provide meaningful cash flow which will fund the company’s future exploration and development activities.”
With Elgin’s past-producing Lupin gold mine in Nunavut expected to come on stream in 2014, Downey says gold production from the combined company will eventually be well over 100,000 oz., creating a strong junior gold producer with two mines in the Arctic. “It [Bjorkdal] is an Arctic project, although having visited, it’s not truly Arctic — it’s 30 km from the ocean and it’s quite pleasant,” Downey admits with a chuckle. “But, they [Gold-Ore staff] do have underground and open-pit experience in cold weather and that does bring a level of knowledge to our team.”
Bjorkdal currently derives about half of its production from open-pit mining with the other half coming from underground mining. Though it only has about 3.5 years of proven and probable reserves left, Gold-Ore executives say the mine has had a strong record of replacing reserves every year during its 23-year mine life. For 2012, they expect gold production to remain the same as last year, about 40,000 oz. gold. Cash operating costs for 2011 have yet to be disclosed but are expected to come in around US$900 per oz.
In the conference call, Downey acknowledged Elgin’s board made its decision based on Bjorkdal’s current output levels but will hope to lower cash costs and increase production slightly. “We see that there is significant potential to, number one, reduce dilution and get a higher mill feed. We also see that there are a lot of veins here so with a little bit different mine planning we can reschedule things… Optimally it should be a 50,000 oz. a year gold producer; at one time it produced 90,000 oz. per year.” Elgin will also assess whether it could replace the contract miners and equipment at its open-pit operation with its own fleet.
The deal with Elgin means Gold-Ore will not be going ahead with a previous agreement to merge with Europe-focused gold explorer Astur Gold (AST-V), and will pay it a $2.5-million break free. Shortly after the Elgin transaction was announced, Astur notified Gold-Ore it would exercise its right to match the offer.
Glen Dickson, Gold-Ore’s chairman, called the Elgin offer “superior” while noting: “Elgin brings a near-term development project in an of low political risk, low capital risk and no permitting risk. This is exactly what Gold-Ore has been seeking for some time now. But also, and equally importantly, we’re very excited about having the Elgin management team with its proven track record working with us to optimize our mining operation.”
The two companies will have about $35 million in cash on hand after combining and a market capitalization around $175 million.
The focus of 2012 will be on advancing Elgin’s Lupin project, which produced 3.5 million oz. under Echo Bay Mines and Kinross Gold (kgc-t, kgc-n) before closing in 2003 because of the low gold price. This summer Elgin plans on putting the mill back together with a small crew, as well as completing drilling to define a National Instrument 43-101-compliant resource. So far, internal studies allow for a potential restart around May 2004 at a throughput rate of 1,000 tonnes per day, with an average head grade of 9 grams gold per tonne. Downey reckons the operation could produce 80,000 to 90,000 oz. gold each year. “[It’s a] very well understood, very continuous type of orebody, still open in several areas.” He notes the project is already fully permitted for mining operations, the company just has to give 60 days notice “and we’re off to the races.”
Elgin also has plans to further explore another high-grade Nunavut gold project, Ulu, located about 150 km north of Lupin. The acquisition will mean Elgin’s total outstanding shares will rise to 147 million from 55 million, of which 10 million are held by Elgin directors. Bob Buchan will remain chairman of the company, as will Downey in the positions of president and CEO. Gold-Ore’s Robert (Bob) Wasylyshyn will take the role of chief operations officer, while four Gold-Ore directors join the Elgin board.
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