Iamgold gets a deal on key West African asset

Iamgold (IMG-T, IAG-N) is using the slumping market as an opportunity to grab a key asset in West Africa.

The company announced an all share deal with Orezone Resources (OZN-T, OZN-X) that, if approved, would secure Orezone’s Essakane project in Burkina Faso for Iamgold.

Essakane is one of West Africa’s biggest undeveloped deposits with reserves of 3.1 million oz. of gold and Iamgold may acquire it for what would work out to roughly US$139 million.

The acquisition will take Iamgold, it says, to the “next level” as it helps it close in on its goal of turning out 1.8 million ounces of gold per year by 2012. 

“With this transaction, we are able to achieve a significant production increase in the near-term, a cost reduction of $40 to $50 per ounce and a 32% increase in reserves, with modest share dilution,” said Iamgold’s chief executive Joseph Conway in a statement.

Iamgold’s current average production costs are in the US$480 per oz. range.

The deal will see Orezone keep its exploration assets outside of Essakane, as a new company will be formed, shares of which will be distributed pro rata to current Orezone shareholders.

Chief among those exploration assets is Bombore, considered to be the second largest gold resource in Burkina Faso with 1.7 million ounces of measured and indicated resources.

The new Orezone company will be headed by current Orezone management and Iamgold would hold a 16.6% interest in the new company.

As for the deal for Essakane, Iamgold is offering each Orezone shareholder 0.08 of an Iamgold share on top of the pro rata share of the new Orezone for each Orezone share held

That represents a value of roughly 49¢ per Orezone share based on Iamgold’s Dec. 10 closing price of $6.10 and a 91% premium using 30-day volume weighted average share prices.

But Iamgold still has some convincing to do if the deal is to be consummated in February of next year.  Despite Orezone’s board approval the deal currently has voting agreements in place for roughly 5.1% of the outstanding shares of Orezone

Given tight credit, however, Orezone shareholders may have little choice but to take the offer.

Construction at Essakane started in September but the difficulty Orezone faced in raising cash in either the debt or equity market left the project vulnerable to a company with a stronger balance sheet like Iamgold.

Essakane is anticipated to produce 300,000 ounces per year over a nine-year mine life at an average cash operating cost of US$358 per ounce, using a US$600 per ounce gold price.

Capital expenditure for building the mine is estimated at US$350 million.

Ron Little, Orezone’s chief executive, stated the obvious in a press release when he said Iamgold would bring much needed capital at a time of difficult markets.

“The transaction provides our shareholders an opportunity to capitalize on significant value creation in Iamgold,” he said in a statement.

The deal would see current Orezone shareholder holding roughly 9% or 28.6 million shares of the 324.3 million shares that Iamgold would then have outstanding.

Iamgold says it is already in discussions with project lenders to provide the US$160 to $220 million it will need to develop Essakane.

The deal has a $4 million break fee connected to it.

Essakane, which is slated to go into production in 2010, would represent roughly 25% of Iamgold’s total gold production.

The move would also further solidify Iamgold’s presence in West Africa – it is on track to turn out roughly 400,000 oz of gold in the region this year – and it will open an office in Senegal to emphasize the point.

Iamgold also announced it will buy 71.4 million common shares of Orezone for 28¢per share, regardless of whether the deal goes through or not. That will give Orezone roughly $20 million to use towards carrying on with developing the project. The move would give Iamgold a 16.6% stake in Orezone.

Orezone issued $10 million worth of convertible debt in July of this year. The deal with Iamgold would see the debt that repaid in cash and Iamgold shares.

The US$40 million bridge loan Orezone recently secured for constructing the mine would also be assumed by Iamgold

Iamgold currently produces close to one million ounces from eight mines on three continents.