Lupaka and Andean to merge

Lupaka Gold (LPK-T) and Andean American Gold (AAG-V) are proposing to merge in a friendly deal that would create a Peru-focused gold explorer and developer with combined resources of 2.1 million oz. gold equivalent in the measured and indicated category, and 0.9 million oz. gold equivalent in the inferred.

Each company would bring significant assets to the table.

Lupaka would contribute its flagship Crucero gold project in the southeastern Department of Puno, including 10 more targets within the project area. An updated resource estimate in March outlined 1.14 million oz. gold in the measured and indicated category and 0.65 million oz. gold in the inferred, starting from surface. The deposit contains 35 million tonnes at a capped grade of 1.03 grams gold per tonne in the indicated category, and 29 million inferred tonnes at a capped 0.70 gram gold. The estimate is based on the A-1 zone — one of 10 anomalies targeted for follow-up drilling.

Andean American would chip in near-term underground gold and polymetallic development potential at its Invicta gold-silver-copper project, where an updated resource estimate in April outlined 967,000 oz. gold equivalent in the measured and indicated category, and an 236,000 oz. gold equivalent of inferred at a cut-off grade of 1.30 grams gold equivalent. (An upgraded feasibility study was suspended in October 2011 to conserve cash and take advantage of merger-and-acquisition opportunities.) So far Andean has completed one of three community agreements with local groups at Invicta.

Andean American also  brings a 17% strategic stake in Southern Legacy Minerals (LCY-V).

Southern Legacy’s flagship gold-silver-copper exploration project, AntaKori, lies in northern Peru’s Cajamarca district, 5 km from Gold Fields’ (GFI-N) Cerro Corona mine and 30 km from Yanococha, adjacent to Buenaventura’s (BVN-N) Tantahuatay mine. AntaKori has inferred resources of 5.9 billion lb. copper equivalent at an average grade of 0.92% copper equivalent and remains open in all directions, with 70% of drill targets to be tested over epithermal, hydrothermal breccia and skarn targets.

If the merger goes ahead, Lupaka shareholders would own 54.7% of the new company and Andean American shareholders would hold a 45.3% stake.

Under the plan of arrangement, Andean American shareholders would receive 0.245 share of Lupaka for each share of Andean American held. This is a 21% premium to Andean American’s 20-day volume-weighted average trading price for the period ended July 5.  

“The premium is very attractive — it’s a reasonable premium for a merger,” Eric Edwards, Lupaka’s president and CEO, told analysts and investors on a conference call.

The transaction will also launch the combined company with $18.4 million in cash as of June 30. “The strong cash balance is certainly something that is important to us,” Edwards noted, adding that it will help fund exploration at Crucero and finance the company “for several years going forward.”

Over the last three years Lupaka has delivered a 50% increase in resources, Edwards added.

“We began trading in June 2011. At that time we had one project, Crucero, and an ambitious focus to create a Peruvian-based exploration and early stage development company,” he continued. “Crucero has been good in terms of delivering exploration results, and we’ve been successful in growing the resource . . . the properties Andean American holds will create good balance and diversify our Crucero project.”

In the near-term Crucero will be the exploration priority. Two drills are turning on the property and a third drill will arrive before August, and begin drilling outside the A-1 zone, on which the resource estimate is based, towards some of the other nine anomalies. “We’re more than the A-1 zone,” Edwards declared. “We feel very confident as management that we’ll have significant discoveries in the A-3, A-4 and A-5 zones . . . watch this space, because up to now we’ve only drilled the A-1 zone.”

As for Invicta, the combined company will concentrate on building community relationships to move the project forward. “One community has signed a community agreement and another one is quite close [to doing so]. But in another, there is quite a lot of work to be done,” Edwards said. “We [now] have the diversification and luxury of having a little time to step away and take a look at community relations . . . and see how we want to handle the development going forward.”

Edwards noted that the business combination also helps out in terms of liquidity and market presence.

“Andean has some institutional coverage that they will be transferring over, but it also has a higher degree of liquidity and retail following. One of Lupaka’s challenges was that [while] shareholders liked the story, it has been a tightly held stock with tight liquidity, and we look forward to bringing in a new group of shareholders.”

As for operating in Peru, Edwards had nothing but good things to say, pointing out that in 2010 mining represented 60% of Peru’s total export revenues, and mining investments the same year brought $7 billion in foreign direct investment. He also pointed out that 20% of Peru’s workforce is employed in the mining sector.

“Peru has a long history of stable mining rights and permitting law, and we’ve seen the government take steps to protect the contracts in place as well,” Edwards said. “We are encouraged with the Humala government . . . we’re encouraged with its support of the contracts that have been signed, and see Peru as presenting a great and continued potential for exploration and new discoveries . . . we see the government of Peru functioning very effectively. We’ve been able to get our permits [and] renew our permits.”

The two companies have set a reciprocal break fee of $1.15 million, but expect the transaction to close as early as September.

In trading right after the merger news Lupaka was at 75¢ within a 52-week range of 80¢–$1.47. Andean American’s shares traded at 18.5¢ within a 52-week range of 11¢–67¢.