Eldorado expands into African districts — Two gold mines added to international portfolio

Two operating gold mines and nine exploration properties in Africa will be acquired by Eldorado Gold (ELD-T) as part of a second-stage transfer of assets to the company from South African mining house Gencor.

The proposed US$193.6-Million transaction will be Eldorado’s second with Gencor in the past two years.

The first deal, valued at US$108 million, resulted in the acquisition of an international portfolio of exploration projects, the producing Sao Bento gold mine in Brazil, and the right to market Gencor’s proprietary BIOX bacterial oxidation technology in North America. In return, Gencor received sufficient shares to become Eldorado’s largest shareholder, with about 40% of its voting shares.

Gary Maude, Gencor’s executive director, told a group of mining analysts in Toronto that more than 700 junior companies were reviewed before Eldorado was selected as the company best suited to take on gold projects deemed too small for the large conglomerate.

“We wanted a Canadian company with access to Canadian capital,” he said, adding that while Gencor “liked what it saw” at Eldorado, it was nonetheless nervous about the first transaction, which essentially doubled the size of the junior company. “They coped well and we are now more confident of their ability to digest this latest deal, which is a sizable one.” Maude also adds that, while it might seem unusual for a South African company to bring a Canadian company to develop African projects, most of the assets in this transaction are in greenstone belts, “similar to what is seen in Canada.”

Eldorado’s latest transaction with Gencor (which is still subject to due diligence and various board and regulatory approvals) includes a 90% interest in the Bogosu gold mine in Ghana and a 45% interest in the soon-To-be merged Fairview-ETC gold mine in the Barberton greenstone belt in South Africa.

Bogosu is an open-pit mine which currently processes oxide reserves, but it is believed to have good potential for underground sulphide resources amenable to BIOX technology. The project is in the Ashanti gold belt and includes a number of exploration targets.

The exploration properties include various interests in eight gold projects in Ghana, which collectively host resources containing 1.3 million oz., as well as preliminary resources containing an additional 1.8 million oz.

Several advanced projects are situated in the less explored Sefwi belt where, unlike the Ashanti belt, mineralization appears to be non-refractory.

In South Africa, Gencor expects that the introduction of Canadian exploration and mining expertise will breathe new life into the Barberton greenstone belt, where the Fairview-ETC mine is situated. Eldorado also has the right to negotiate to acquire Gencor’s interest in the Burnstone gold development project in South Africa. The latter is a traditional Witwatersrand-Type target.

The latest transaction is more financially complex than the previous one and includes US$140.3 million on closing and US$53.3 million payable as deferred compensation (subject to certain conditions). The total consideration will be settled through the issuance of US$26.3 million cash, US$50 million in interest-bearing notes, US$109.9 million in Eldorado non-Voting shares and US$7.4 million as a 1.5% net smelter return royalty on production from certain properties. Gencor’s voting interest in Eldorado will remain at 40%.

The acquisition is expected to boost Eldorado’s 1997 production by 18% to 230,000 oz., at an average cash cost of US$269 per oz. Once the transaction is completed, Eldorado will have interests in five gold mines: La Colorada and La Trinidad in Mexico; Sao Bento in Brazil; Bogusu in Ghana; and Fairview-ETC in South Africa. The company also has an 18% interest in Croesus Mining, which operates the Binduli gold mine in Australia, and a portfolio of international exploration projects.

By 1998, Eldorado expects to boost its production to 375,000 oz. at an average cash cost of US$266 per oz. This number will include about 2,000 oz.

of initial production from the Kaymaz mine in Turkey, which is expected to begin production in the fourth quarter. Sao Bento will remain the largest producer at 120,000 oz. (cash cost: US$280 per oz.), followed by Bogosu at 90,000 oz. (US$250 per oz.), Fairview-ETC at 68,000 oz. (US$300 per oz.), La Colorado at 65,000 (US$250 per oz.) and La Trinidad at 30,000 oz. (US$215 per oz.).

Last year, Eldorado produced 103,122 oz. gold at an average cash operating cost of US$272 per oz. — a 231% increase over the 31,128 oz. produced in 1995.

Eldorado President Richard Barclay fielded several questions from mining analysts related to the company’s ability to take on the new mines and, at the same time, advance a number of projects to production.

The company hopes to achieve production of 500,000 oz. annually by the year 2000 and then move into the top tier of 1-Million-oz. producers within the next decade.

Barclay conceded that scaling up annual production to those levels is no easy task when done “brick by brick” with a number of smaller gold properties, rather than with a single property capable of producing huge amounts annually, such as Barrick Gold’s Goldstrike property in Nevada.

“We are taking on a technical challenge, a geographic challenge and a human resource challenge by trying to build four mines in two countries in the next few years,” Barclay said. “You can only do this if you are hungry and have the right team in place. And I think we have shown that we can deliver on our promises.”

To achieve these goals, Eldorado intends to strengthen its technical team by taking on more senior management experienced in building and operating mines.

It also may farm out some of its projects in order to advance them, using additional funds provided by the partners.

Maude told analysts that he believes Eldorado will be able to digest the latest asset package, and he hinted that other gold assets will be made available in the years ahead. “When you go looking for gold, you find some smaller ones that are not appropriate to the scale of Gencor’s business. We are a big company with big cupboards.”