The cash offer represents a premium of about 66% to the 20-day volume-weighted average price of Amarillo’s common shares on the TSXV on November 29.
Amarillo had $25.2 million in cash, gross assets of $72.2 million and no debt as of September 30. It reported a loss before income tax of $3 million for the year ended 2020.
As part of the transaction, Hochschild will spin out Lavras Gold Corp to hold a stake in the advanced Lavras do Sul exploration project, also in Brazil. Amarillo shareholders will receive shares in the NewCo, which will be capitalized with $7.8 million cash and hold a 2% net smelter return royalty on concessions outside the current Posse resource and mine plan on the larger Mara Rosa property.
The transaction aligns with Hochschild’s core strengths and long-term strategy of acquiring and optimizing development-stage projects in the Americas, the company said.
Given the declining investment certainty profile in Peru, where Hochschild’s biggest mines are located, the transaction will enhance the company’s portfolio by adding a long-life asset located in a mining-friendly jurisdiction.
It also exposes Hochschild to a high-quality project with attractive costs where specific infrastructure construction is underway. Posse also offers near-mine and regional exploration opportunities.
The transaction has been unanimously recommended by the board of directors of Amarillo and has the full support of Amarillo’s shareholders, Baccarat Trade Investments and Eric Sprott. The Hochschild board unanimously intends to recommend that shareholders vote in favour of the transaction.
As it stands, Posse is a shovel-ready gold project that is expected to be built within two years of breaking ground.
In February, the project received a construction licence from state regulators and approval for the power line in October. Hochschild has revised the Posse mine plan contained in the August 2020 definitive feasibility study and will make further details available in a shareholder circular to be distributed shortly.
A brownfield site, it was mined by a different operator in the 1990s. There are two small pits from the previous operation and existing infrastructure. Labour is available in the nearby town of Mara Rosa, where most people are said to support the project.
According to the BFS, once built, the mine will produce 102,000 gold ounces per year in its first four years and have an average annual gold profile of 84,000 ounces based on an initial mine life of 10 years.
The all-in sustaining cost over the mine life is expected to average $750 to $850 per gold ounce.
Average recoveries are expected to be 89.9%, and the average strip ratio over the mine life is 4.3.
The $180 to $200 million project generates an after-tax NPV (5% discount) of $150 to $160 million, based on a $1,600 per ounce gold price, and an IRR of 18% to 20%. At $1,800 per ounce gold price, the figures rise to $200 to $240 million and 24% to 26%, respectively.
Posse hosts proven and probable reserves of 23.8 million tonnes grading 1.18 grams per tonne for 902,000 ounces. The combined measured and indicated resource stands at 32 million tonnes grading 1.1 gram per tonne for 1.2 million ounces of contained gold.
Hochschild has identified near-mine and regional exploration opportunities for Posse and the Mara Rosa property. Posse is open down plunge to the southwest, potentially extending the mine life near the existing pit shell.
There is also an opportunity to define multiple satellite deposits on the 10-kilometre Posse structural trend, including the Araras, Speti 24 and Pastinho priority targets. Recent drilling has identified Pastinho as a promising target with similar geological characteristics to Posse and multiple parallel gold structures extending from the surface to approximately 200 m of vertical depth while remaining open.
In addition to the 2,500 hectares of mining concessions containing the Posse deposit and the 6,000 hectares of exploration concessions on the Posse structural trend, Hochschild will acquire an additional 59,000 hectares of regional exploration concessions on the Mara Rosa property.
The transaction is expected to close in the first quarter of 2022.