Merger of Equals: Producing Junior Gold Mines Combined in West Africa
Global markets have become increasingly volatile due to the deepening financial crisis, while gold bugs are gripping their seats. For investors, this means that gold stocks are a bargain, considering their current detachment from the bullion’s spot price. And for the miners, now is the best time to look for acquisitions, as the value of producing junior and mid-tier gold companies is considerably lagging the price of the underlying physical commodity.
Not surprisingly, Australian and Canadian companies are leading the charge. Canada’sEndeavour Mining [EDV: TSX], which we covered recently in an article on its West African gold properties, has announced a merger with Australia’s Adamus Resources Ltd. [ASX: ADU]. The merger will add ADU’s Nzema gold mine in Ghana to EDV’s Youga gold mine in Burkina Faso and Agbaou gold project in Cote D’Ivoire. The newly merged company will operate under the leadership of Mr. Neil Woodyer, current CEO of Endeavour.
The merger will see an estimated production of 172,000 oz of gold in 2011, growing to 250,000 oz by year end 2013. The new company constitutes an all-stock transaction that allows shareholders to fully participate in future growth and value creation, with all shareholders of ADU to receive 0.285 shares of EDV for every share of ADU held. After the deal closes, shareholders of Endeavour will own 55 per cent of the merged company, while shareholders of Adamus will own 45 per cent, with 288 million shares fully diluted.
The deal, according to Woodyer, is a “merger of equals.” Endeavour will bring its sound financial backing and management to the table, while Adamus brings its project mine building expertise and a newly producing gold mine. ADU’s Nzema mine contains an estimated JORC compliant gold reserves of 1,068,000 oz’s and an additional 2,118,000 oz of measured, indicated and inferred gold resources. The mine is estimated to deliver 80,000 – 100,000 oz of gold per year. As well, the mine is expected to develop into higher-grade ore by 2013, which should improve the average grade.
Endeavour will spend at least $160 million in cash to reduce Adamus’ loan and gold hedge for its Nzema project. With 275,000 oz hedged at US$1075 per oz at the end of June 2011, there are approximately 50,000 oz hedged per year over the next 5 ½ years. Upon closing the merger in December 2011, Endeavour plans to spend at least $60 million from its current cash reserves to repay the project loan principal and at least $100 million will go to paying down the hedge. At the current gold price, EDV will cancel approximately 125,000 oz of the hedge by late 2011 and expects the operation to be close to fully exposed to the spot price of gold in 2012-2014. Taking into account the fact that leading forecasts for gold in 2012 push for the yellow metal passing the $2000 mark, this is a considerable advantage.
On top of the producing Nzema mine, EDV brings to the table its highly touted Youga mine and feasibility stage Agbaou project, with management’s projections of gold production illustrated below:
With the 2011 estimated gold production from the Youga and Nzema mines at 172,000 oz, the production rate expected for the end of 2013—leading into the opening of Agbaou—brings the total to 250,000, adding another 73,100 oz per year once Agbaou begins. However, according to EDV, the ongoing acquisition growth strategy is expected to more than double the gold production rate by the end of 2013.
Cannacord Genuity gold analyst Nicholas Campbell has EDV’s 12-month target price at $5.00 with a “speculative buy” in response to the merger with Adamus. This price gain of more than 100% illustrates the undervalued nature of the stock and the exciting prospect the merger with Adamus can accomplish.
The deal points towards a well-positioned growth company with a solid financial position from two (and soon to be three) operating gold mines. With an objective of growing into a 500,000 oz per year gold producer through the development of Agbaou and additional M&A activity, the new company is taking on Endeavour’s ambitious growth plans, which will further its production profile among the big players. The addition of Adamus’ development strength and significant gold reserves will create a more diversified production base. With the ongoing chaos and the rising price of gold, Endeavour and Adamus are demonstrating that now is the time to grow while the deals are cheap and investors are waking up.
More information on the merger can be found here