Crew Gold looks to keep on growing

Crew Gold (CRU-T) is growing up in a hurry. On Monday the company announced a proposal to acquire Guinor Gold (GNR-T) — a deal which, if approved, will turn the small junior into mid-tier company in a span of just three years.

“Our management team has done a phenomenal job,” Crew’s President and Chief Executive Jan Vestrum says. “We’ll be a big mid-tier…and we’re sniffing at becoming a major.”

The acquisition of Guinor will not only add to the international scope of Crew’s operations — it currently has gold mines in Greenland and the Philippines — but it will also add heft to its total gold reserves. Guinor’s assets in Guinea would prop up Crew’s proven and probable gold reserves to approximately 2.5 million oz. and its resources to roughly 7.4 million oz.

Crew’s offer is a 100% purchase of Guinor shares at $1.50 per share, in an all cash, fully financed transaction valued at $389 million.

Guinor’s West African assets are held through its 85% ownership of its subsidiary — Societe Miniere de Dinguiraye (SMD) — in Guinea. The government of Guinea has the remaining 15%.

Guinor is expanding its carbon-in-leach plant so that it can handle a forecasted output of more than 300,000 oz. of gold a year by 2007 at a cost of US$234 per oz.

As of March 2005, Guinor’s proven and probable reserves were 40.5 million tonnes at a grade of 1.7 grams of gold per tonne (or 2.3 million oz.) contained within a measured and indicated resource 68.1 million tonnes at a grade of 1.6 grams of gold per tonne for 3.43 million oz. Inferred resources stand at 18.8 million tonnes at a grade of 1.4 grams of gold per tonne for 900,000 oz.

In a conference call Vestrum said the offer to acquire Guinor came on the heels of the company’s strategic decision to diversify assets across the globe.

“The industry tends to like more focused plays,” Vestrum said. “That sounds sensible but when we made a strategy to diversify we looked at an overall portfolio strategy. If you’re focused in on one region then you’re taking one political risk.”

On the same conference call Vestrum said Guinor was targeted after Crew scanned the market for a company with a minimum gold production of 100,000 oz. per year and a seven year mine life. He said 40 to 50 companies were looked at and Guinor made a short list of three.

“This a good fit,” Vestrum said, “(Guinor) is a company with strong growth potential and a strong management team… we’re adding one of the best projects in Africa.”

One analyst says the $1.50 per share price offered by Crew is fair as it offers a 50% premium to Guinor’s historic share price. Guinor shares had largely been trading in the 90 cents to $1.10 range until a spike in early September. In Toronto on Monday, Guinor shares were trading at $1.40 – greatly reducing the premium.

Vestrum attributes the spike to Crew’s interest in Guinor.

“(Guinor investors) should recognize that the 50% run up must have had something to do with (Crew’s interest in Guinor),” Vestrum says.

The analyst says if Guinor shareholders do not accept the offer, the company will likely dilute shares in an effort to raise the cash necessary for further exploration on its Guinea property.

“This might be the right time to get out,” the analyst says with regards to Guinor investors. If there is resistance to the transaction from Guinor shareholders it may come from investors who project a spot-gold price of US$600 per oz. in the future, the analysts says. Guinor’s current resource of 2.3 million oz. could go up to as much as 3 to 4 million oz. the analyst says – which would represent significant value to Guinor shareholders down the road were they to reject Crew’s offer.

But Vestrum doesn’t anticipate much resistance. He is confident of the roughly 67% approval he needs from the shareholder of both companies. Crew already has a 53% written commitment in favour of the deal.

“It’s a slam dunk from our side,” Vestrum says. “We know the shareholders quite well and we’re not concerned (about their approval).”

Guinor’s President and Chief Executive Trevor Schultz was not immediately available for comment, but in the press release he was quoted as saying: “We believe that this all cash offer is fair to our shareholders and provides them with the opportunity to reinvest in what is destined to be on of the sector’s most exciting companies.”

Schultz has agreed to stay on as President of African Operations if the deal goes through.

Vestrum contends the combined story of Crew and Guinor is much better than the single story and he relates such combined strength back to the advantage of diversifying in the right way.

“It’s more than just diversifying projects,” Vestrum says. “If your three projects are in West Africa you’re still exposed to the same political risk. From our management’s point of view, you have to have exposure to different areas.”

When asked if Crew was diversifying into regions with equal risk – perceived political risk in the Philippines and Guinea, and the risk of market unfamiliarity with Greenland — Vestrum says the Street’s reaction to both the Philippines and West Africa has greatly improved as their governments show more stability and he anticipates a turn in favour for Greenland…eventually.

“Greenland needs a few more years,” Vestrum says, adding that after more mines are established, credibility with investors will come.

Crew’s 82% owned project in Greenland, Nalunaq, has annual production of 100,000 oz. and measured and indicated resources of 313,000 oz. with another 926,000 oz. inferred.

Crew’s recently acquired Apex Mining in the Philippines is targeted to produce more than 100,000 oz. in 2006 and 200,000 oz. by 2007. Crew has commissioned an independent resource evaluation that will use Canadian standards to confirm the Philippine government’s mining agency’s results of 500,000 to 600,000 tonnes of gold at 9 to 10 grams of gold per tonne and an inferred resource of 1.7 to 1.9 million oz. at similar grades.

If the deal is approved in late November, there is no indication that Crew will be satiated. While Vestrum won’t tip his hand to reveal any future merger and acquisition targets, he did indicate that his company’s bullishness on the Philippines could lead to future endeavours.

“We’re keen on the Philippines,” Vestrum says. “Don’t be surprised if we do something in the Philippines.”