Rio Narcea eyes Tasiast in share-swap deal

With an increasingly hostile four-way merger battle raging elsewhere, Rio Narcea Gold Mines (RNG-T) and Defiance Mining (DM-T) have tabled plans for a friendly share-swap deal valued at around $52.6 million.

Under the plan, Rio Narcea will acquire all of Defiance’s shares at the rate of one of its own shares for every 5.25 shares of Defiance. The deal values Defiance shares at 53 apiece, which represents a 37% premium over the issue’s closing price on June 29, the day before the deal’s announcement.

The scheme is subject to regulatory approval, and requires the go-ahead from at least two-thirds of the votes cast by Defiance shareholders at a special meeting planned for late August. The deal includes a $1.2 million break-fee payable by Defiance.

The plan also calls for Defiance CEO John Hick to remain as a director of Rio Narcea and become the company’s vice-chairman. Defiance’s non-executive chairman Cliff Davis would also join Rio’s board. The transaction is expected to close in early September.

Defiance’s key asset is the permitted Tasiast gold project in Mauritania, West Africa, where measured and indicated resources tip the scales at 12.1 million tonnes running 3.1 grams gold per tonne, including 9 million tonnes of reserves grading 3.1 grams gold. About 65% of the tonnes are found in primary mineralization; the balance is oxide ore. An additional 12.4 million tonnes of inferred material runs 2.25 grams gold. The estimates are based on a cutoff grade of 1gram gold.

A bankable feasibility study completed by SNC-Lavalin (SNC-T) in April envisages a 4-pit operation producing 110,000 oz. gold from 1.2 million tonnes of oxide ore in each of the first three years. In subsequent years, the operation is expected to produce around 102,000 oz. gold from 1.1 million tonnes (T.N.M., May 10-16/04).

Tasiast carries a price tag of US$48.4 million, and assuming 100% equity financing and a gold price of US$400 per oz, an internal rate of return of 22.5%. The rate of return climbs to 32% at a gold price of US$450 per oz., and falls to 12.7% at US$350 per oz.

Defiance says that Tasiast’s mineralized zones extend deeper than the current pit bottoms, suggesting potential for future underground mining.

Rio Narcea plans to immediately begin optimization of the study with Defiance, and hopes to make a production decision as soon as possible, with the goal of achieving production within two years. Construction would be partially funded via projected cash flows from Rio Narcea’s Aguablanca nickel project, northwest of Seville, Spain. That mine is expected to begin producing later this year.

In the end, the company says the acquisition will help boost its annual gold production to more 300,000 oz. within three years. By comparison, Rio Narcea expects to produce some 90,000 oz. of gold at a cash cost of US$240 per oz. from its existing operations in 2004.

Defiance also holds exploration permits covering some 16,000 sq. km in Mauritania. Rio Narcea plans a detailed review of the properties to determine their future.

“Strategically, Tasiast will also provide us with a presence in West Africa, undoubtedly one of the world’s major gold provinces,” said Rio Narcea chairman Chris von Christierson in a prepared statement.

Currently, Rio Narcea is shifting to underground mining at its El Valle and Carls mines in Spain’s Asturias region. Nearby, the company has begun a feasibility study of the recently acquired Salave gold project. Meanwhile, construction is nearing completion at the Aguablanca nickel-copper-platinum-group-element deposit in the southwest of the country. The company also holds a 6,000-sq.-km land package mostly in Spain, and Portugal.

Shares of Rio Narcea were off 17, or 6.1%, at $2.63 in late afternoon trading in Toronto following the news on June 30; Defiance shares were 8, or nearly 21%, higher at 47.