Giustra Looks To Gold With Etruscan Stake (October 05, 2009)

Legendary financier Frank Giustra is getting into another gold venture, this time in Africa.

The Giustra-connected Endeavour Financial (EDV-T) tabled an offer that would give it a 54% stake in sought-after West African gold producer Etruscan Resources (EET-T, ETRUF-O) by forking over US$43 million in cash for shares of the company.

The offer immediately led Century Mining (CMM-V, CMNZF-O) to drop its plans to acquire 26 million shares of Etruscan.

That would have given Century a 19.9% stake in the company but with Endeavour arriving on the scene, that stake would be signif icantly smaller, prompting Century to pull out of the deal altogether.

Endeavour’s private placement — which would see it pay 30¢ per Etruscan share — would also trigger a major financial restructuring of Etruscan that would clean up the debt-ridden company’s balance sheet and position it for future growth.

To help ensure that growth materializes, Endeavour would nominate four directors to Etruscan’s seven-member board.

Included in those nominations would be Frank Giustra himself, along with Endeavour’s chief executive Neil Woodyer, Gordon Keep and David Street.

While Giustra is not part of Endeavour’s management team, nor its board, the company has a strategic alliance with Fiore Financial, of which Giustra is president and chief executive.

Endeavour says the move is part of its “macro gold-focused investment strategy,” and that it will provide further support for Etruscan’s recent efforts to improve operations at its flagship Youga gold project in Burkina Faso.

“Endeavour’s track record of success includes its role in the creation and growth of Wheaton River, which ultimately became Goldcorp. We welcome Endeavour’s ongoing active role in guiding Etruscan to drive growth and share value,” Gerald McConnell, Etruscan’s president, said in a statement.

Endeavour has roughly US$150 million in cash dedicated to a gold-focused investment strategy. The move on Etruscan is its first major step towards realizing its goal of ultimately creating an intermediate-sized gold company.

Endeavour said its belief in Etruscan comes from the company having quality underlying resource assets but with short-term financial challenges that have left its share price waterlogged.

The first thing Endeavour says it will do to get some lift in Etruscan’s market cap, is tidy up the company’s ugly hedge book.

Endeavour says US$23 million of its investment would go to repurchasing gold call options that had much of Etruscan’s production hedged at US$700 per oz. gold. The repurchase will reduce the hedge book by 50%, leaving hedged only 20% of total production.

The deal will also bring a restructuring of Etruscan’s debt.

In connection with the deal, RMB Australia Holdings and Macquarie Bank have agreed to defer debt repayments until December 2010.

If the deal goes through, the banks would convert US$3 million of Etruscan’s US$33-million outstanding facility to common shares of the company at the 30¢-per-share level.

Other funds from the deal would flow towards paying down US$8.5 million of Etruscan’s unsecured convertible debt, and US$5 million would go towards working capital and improvements at Youga, which went into production last summer.

Key issues at Youga that Endeavour is targeting are the completion of projects tapping into the power grid from neighbouring Ghana, and the implementation of better drill and blast methods.

Under the burden of its debt payments, Etruscan found itself cash strapped and unable to maximize the mine’s potential. Even many of the tweaks and balances that are needed at any new mill had to be forgone because of the cash crunch — a situation the Endeavour investment would also remedy.

Etruscan has a 90% stake in the Youga open-pit gold mine, with the government of Burkina Faso holding the rest.

The mine has an estimated 6.6- year mine life and the open pit is expected to produce an average of 88,000 oz. of gold per year at a cash cost of US$560 per oz.

Etruscan shareholders will vote on the transaction on Oct. 22.

Endeavour says it has already received support from key Etruscan shareholders, who hold more than 40% of the issued and outstanding shares.

The market also signalled its approval of the deal, sending Etruscan shares up 13% since the news was released on Sept. 23; the stock traded at 44¢ at presstime in Toronto. Endeavour shares gained 5% over the same period and were trading for $1.85 at presstime.