Goldcorp and Eldorado both want Andean

Andean Resources (AND-T, AND-A) was thrust into the spotlight in the early hours of Sept. 3 as two offers for the company came in rapid succession.

The first offer came from Eldorado Gold (ELD-T, EGO-N, EAU-A), an all-share bid that values Andean at $3.4 billion.

Without giving shareholders a heartbeat to consider the offer, Goldcorp (G-T, GG-N) jumped into the fray by besting the Eldorado by $200 million with a share and cash offer of $3.6 billion.

Goldcorp’s offer not only benefits from being richer, but also from having the unanimous support of Andean’s board.

But on a conference call, Eldorado’s president and chief executive, Paul Wright, didn’t sound like a man that would be easily deterred.

“We wouldn’t be launching a proposal a day before the labour day weekend if we weren’t serious about it. We will keep our options open and you’ll see what we do when we do it,” Wright bristled when asked what the company might do in response to Goldcorp’s bid.

The mood over on the Goldcorp and Andean joint conference call was decidedly lighter.

Goldcorp president and Chief executive Charles Jeannes and Andean’s chief executive Wayne Hubert already know one another from their past mining lives.

“Chuck and I worked together when with I was with Meridian and he was with Glamis, and I know Chuck is more than capable to take this over,” Hubert said.

Jeanne denied that the Eldorado offer spurred the Goldcorp bid, and instead said the company’s interest ramped up back in mid-July after Andean released bonanza grade results from its Mariana zone.

“What prompted our action was the Mariana discovery,” he said. “We always new it was a high quality low cost deposit but it just wasn’t big enough to interest us. But the Mariana discovery changed that and as soon as drill results were announced we updated our resource model and saw that it did have the potential to be the size of a project we’d be interested in.”

When asked what specific size Goldcorp looks for when evaluating potential acquisition targets, Jeanne said while tonnage was key, cashflow was the most important factor.

“We don’t’ have specific numbers, if you can get anything above 300,000 to 400,000 oz. per year, it is a meaningful gold producer in the world today,” he said. “But our focus is on cash flow. When you look at a project with cash costs less than US$200 an oz. and capital investment that is very low to worldwide standards, this thing will generate a lot of cash.”

To try and claim such cashflows for itself Goldcorp’s bid gives Andean shareholders the option to take either 0.14 of a Goldcorp share for each Andean share or cash in the amount of $6.50 per share, or a combination of both.

The company says the cash portion of the offer, however, will be capped at $1 billion.

That represents a premium to Andean’s day previous closing price of 34% and a 56% premium on the company’s 20-day volume weighted average.

Despite the higher offer Eldorado’s Wright still trumpeted the merits of his company’s offer of 0.31 of an Eldorado share for each share of Andean. That represents a 53% premium to Andean’s 20-day volume weighted average and would give Andean shareholders a larger portion of the merged company.

“The most compelling argument for Andean shareholders to consider is that the proposal we provide would result in shareholders holding 25% of Eldorado and that would be accompanied by incredible leverage both to the company as it exists and to the Cerro Negro project itself,” Wright said. “The other offer only represents a 9% stake in the existing entity and that is a significant difference.”

Shareholders are set to vote on the Goldcorp offer in November. Break fees for both offers will be 1% of the offer amount as set out by Australian law. Andean is an Australian-based company.

Andean’s has a 100% stake in the Cerro Negro gold project, which is situated in the mining-friendly southern province of Santa Cruz in Argentina.

Part of what has the project so highly sought after is the fact that it hosts a high-grade, near-surface system with extremely low projected cash costs.

A feasibility study completed by Andean envisioned a 2,000 tonne per day mill turning out 250,000 oz. of gold per year at cash costs of just US$60 per oz.

While Goldcorp’s Jeanne said the competitive nature of the bidding process prohibited him from releasing specifics on what Goldcorp expects the project to yield, he did say that doubling both the resource base and mill production was reasonable.

“We’re not buying this for a 3 million oz. resource,” he said. “It will grow, and with that there will be a significant expansion of throughput from what is in the current feasibility study.”

As for the deposit itself, Andean’s estimate divides resources into three distinct zones.

The most significant of the three is the Eureka zone which has indicated resources of 3.6 million tonnes grading 12.3 grams gold and 179 grams silver for 1.4 million oz. of gold and 20.8 million oz. of silver.

The Vein zone has indicated resources of 4.6 million tonnes grading 3.73 grams gold for 554,000 oz. of gold and the Bajo Negro zone has 1.8 million tonnes in the indicated category grading 8.74 grams gold and 24 grams silver for 525,000 oz. of gold and 1.4 million oz. of silver.

When tallied together with inferred resources, the project has a total resource of 3.06 million ounces of gold and 26.68 million ounces of silver, but those numbers don’t include results from some 140 recently drilled holes.

As for where Cerro Negro would fit into Goldcorp’s pipeline, the company is currently set to bring its Peñasquito mine in Mexico into commercial production at some point in the third quarter.

Next on the timeline is Pueblo Viejo in the Dominican Republic which is slated to go into production next year. If acquired, Cerro Negro would slot in after that, with production targeted for 2012. That would be followed by production at Cochenour in Ontario in 2014, while its Eleonor project in Quebec and its El Morro project in Chile would come online in 2015.