Geomaque heads down under

The wave of consolidation in the mining industry continues to crash along the shores of Australia with the announcement that junior gold miner Geomaque Explorations (GEO-T) plans to merge with Perth-based St Barbara Mines to create an international gold company.

Combined, the two would form Defiance Mining, which would be headquartered in Toronto, and be listed for trade on the Toronto and Australian Stock Exchanges and the Alternative Investment Market of the London Stock Exchange (AIM).

Under the proposed business combination, St Barbara shareholders would receive 0.226 of a Defiance share for each of their shares, and one St Barbara option would be exchanged for 0.039 of a share in the new company. Geomaque shareholders would get 0.125 of a Defiance share for each of their Geomaque shares.

The deal also calls for Midas Gold, a UK-based company controlled by Strata Mining, to be added to the mix with shareholders receiving 0.440 of a Defiance share for each Midas share held. Strata Mining is St Barbara’s biggest shareholder, and is chaired by Stephen Miller, St Barbara’s president and chief executive officer.

Geomaque and St Barbara expect to wrap up a definitive deal in February. Their plan will face the scrutiny of shareholder at shareholder votes slated for April.

In the end, St Barbara shareholders would own about 64.4% of Defiance, Midas shareholders would have 19.8% and Geomaque shareholders would hold the remaining 15.8%. The post-merger company would have some 130 million shares issued and outstanding.

St Barbara brings with it a portfolio of Australian assets including its Meekatharra gold mining complex in the Murchison gold field of Western Australia, which produced 103,246 oz. of gold at a net cash cost of A$682 per oz. during 2002, down from 147,063 oz. the previous year. The drop in production is attributed to increased ore hardness as the open pits sank deeper and underground ore was introduced to the mill. Production is expected to pick up in 2003 as more higher-grade underground ore is introduced to the mix.

St Barbara has a 130,000-metre aircore exploration program underway at Meekatharra. The company also plans to sink around 23,000 metres worth of reverse circulation holes. The drilling aims to convert resources to reserves.

Proven and probable reserves at Meekatharra tally to 2.97 million tonnes running 2.17 grams gold per tonne for 207,211contained ounces, based on a gold price of A$530 per oz. Total resources come to 12 million tonnes running 2.1 grams gold; another 2.4 million tonnes of inferred resources grade 3 grams gold.

Production at the 88.3%-owned Paulsens high-grade deposit in the Ashburton district is expected to begin in the first quarter of 2004. The company still needs to finish up a bankable feasibility study and secure bank financing and board approval for the project. The operation is expected to churn out an average of 90,000 oz. of gold over five years at cash cost of US$260 per oz. Pre-production capital costs are pegged at US$18 million.

The plan at Paulsens calls and open pit, followed by underground mining, to target a mining inventory pegged at 3.3 million tonnes averaging 4.2 grams gold. The deposit remains open at depth, and St Barabara has a 1,600-sq.-km land package in the district.

Geomaque sole producing mine is the open-pit, heap-leach Vueltas del Rio mine in Honduras. The mine spat out 27,077 oz. gold during 2002 (commercial production was attained mid-year).

After revising mining reserves to reflect actual mining costs and recovery rates, the pit shell now contains about 2 million tonnes grading 2.47 grams gold per tonne. Vueltas is expected to pour 42,000 oz. in 2003 and 35,000 oz. in 2004 at an average life-of-mine cash cost of US$214 per ounce.

As part of the merger deal, Resource Capital Fund II will convert a minimum fee of US$1.6 million owed it under an existing credit agreement into about 3.2 million Defiance shares. RCF has also agreed to drop some royalties under the same credit agreement plus another with Geomaque Honduras.

RCF has also extended by three months, to the end of April, the first quarterly instalment due on the principal amount of the credit facility. Sococo de Costa Rica, a contract miner at Vueltas, has agreed to a similar deal.

For its part, Midas is in the midst of acquiring the Tasiast gold project from Newmont Mining (NEM-T) for US$6.5 million. Newmont will retain a 2% net smelter royalty on gold production exceeding 600,000 oz.

A scoping study at Tasiast suggests annual production of around 120,000 ounces at an average life-of-mine cash cost of less than US$185 per oz. Initial capital costs are estimated at US$37 million. Another US$11 million of sustaining capital would also be required.

When the dust settles, Defiance would boast three mines producing more than 350,000 oz. annually by the end of 2005. Total cash costs are projected to fall from about US$255 in 2003 to less than US$195 apiece by the end of 2005.

The share exchange ratios contemplated under the deal were based on per-share prices of C10 for Geomaque, A21 for St Barbara, and A41 for Midas. At the end of trading on Jan. 9, Geomaque shares were trading 2.5 lower at 11.5; St Barbara’s issue was A2 higher at A13.5.