Iamgold Spies Opportunity Amidst Market Turmoil

Iamgold (IMG-T, IAG-n) continues to make the most of a slumping market in its effort to become a leading mid-tier gold producer.

Just a little more than a week after winning royalty company Euro Ressources (EUR-t), with more than 70% of Euro shares tendered to Iamgold’s A 1.20-per-share takeover bid, the Toronto-based company announced a move, that if successful, will net it the largest undeveloped gold project in Burkina Faso and one of the largest in all of West Africa.

Iamgold has announced a friendly, all-share offer for Orezone Resources (OZN-T, OZN-x), which is developing the Essakane gold project, 330 km northeast of the capital of Ouagadougou.

Essakane hosts 3.1 million oz. gold in proven and probable reserves, 880,000 oz. in measured and indicated resources and another 1.3 million inferred oz. If the offer is approved, Iamgold would be getting all that gold for US$139 million — or roughly US$45 per oz. of gold in the ground.

Getting the project at a relatively cheap price helps to ensure that the acquisition will be accretive to Iamgold’s net asset value and reserves and resources. Once in production, the company says, the deal will also be accretive to cash flow and earnings.

“This is the right transaction at the right time and at the right price,” Joe Conway, Iamgold’s chief executive said during a conference call. He emphasized that the move would be a significant step towards the company’s stated goal of producing 1.8 million oz. gold by 2012.

And there are benefits on the cost side as well. Conway says the addition of Essakane would reduce costs by US$40-50 per oz., and increase Iamgold’s reserves by 32%.

With the benefits to Iamgold shareholders clearly laid out, Conway argued that the deal would also benefit Orezone shareholders — both through their new participation in Iamgold and via the retention of Orezone’s other exploration projects.

Under the deal, each Orezone share will be exchanged for 0.08 of an Iamgold share, plus a pro rata share of a new company, New Orezone, that will hold Orezone’s exploration properties.

In all, the offer represents roughly 49¢ per Orezone share based on Iamgold’s Dec. 10 closing price of $6.10 and a 91% premium using 30- day volume-weighted average share prices.

Despite such a hefty premium, many Orezone shareholders may well be feeling stung by the fact that the offer comes after a collapse in the company’s share price.

Orezone shares had closed as high as $1.75 earlier in the year, but had sunk to a low of 14.5¢ on Dec. 5.

That mighty fall came as the market recognized the company’s growing cash crunch and the difficulty it would have in getting Essakane — which it had already sunk $77 million into — into production.

Orezone’s chief executive Ron Little said falling gold prices combined with the global credit crisis made securing the funds the company needed impossible.

“This became the only alternative available that could move the project forward,” Little said of the Iamgold offer during the conference call.

Orezone began construction at Essakane in September. When completed in 2010, the mine is anticipated to produce 300,000 oz. per year over a nine-year mine life at an average cash operating cost of US$358 per oz., using a US$600-peroz. gold price.

It will take another US$350 million to finish the mine, but it is money that Conway says will be easily raised.

“Iamgold is well positioned with a strong balance sheet, strong operating cash flows and an existing credit facility,” he says.

The company has roughly $216 million in cash and bullion available, plus a credit facility of $140 million, and operating cash flows over the last nine months of $189 million.

With such solid financials, Conway is confident the company will be able to secure between $160 to $220 million in debt financing.

Provided Iamgold can seal the deal and get the mine into production in a timely manner, the company would have two gold mines in the 300,000-oz.-per-year range — the other being its Rosebel mine in Suriname — making it a heavyweight among mid-tier producers.

Essakane would bulk up Iamgold’s overall gold in the ground to 12.7 million oz. of proven and probable reserves, 26.7 million oz. in measured and indicated resources and 8 million oz. in inferred resources.

Conway hopes that such increased heft will bring a re-evaluation from the market. He said while comparable peers are currently averaging a price-to-earnings multiple of roughly 23 times, Iamgold’s ratio is just 13 times.

Another facet of the deal Conway relishes is the increased presence the acquisition would give the company in West Africa. Iamgold is already on track to turn out roughly 400,000 oz. of gold in the region this year, and with Essakane in its arsenal, it would be one of the key players in the region. As an indication of how seriously it views its position and prospects in the area, it announced it will open an operations office in Senegal.

Concurrent with the announcement of the offer was word that Iamgold is buying 71.4 million common shares of Orezone for 28¢ per share, regardless of whether the deal goes through or not. That will give Orezone roughly $20 million — cash it desperately needs — and Iamgold a 16.6% stake in Orezone.

As for the US$40-million bridge loan Orezone recently secured for Essakane, Conway said a one-month extension has already been granted — payment was due in January — and that should the deal go through, Iamgold will pay off the debt.