Breakwater makes offer to acquire El Mochito

Gold producer Breakwater Resources (TSE) has announced plans to acquire all the outstanding shares of American Pacific Mining (TSE) which owns and operates the profitable El Mochito polymetallic mine in Honduras.

Breakwater, which already owns about 9.14% of American Pacific acquired through open market purchases last year, will be making its offer on the basis of three Breakwater shares for each share of American Pacific. That would give the transaction a value of about $90 million on the basis of the current share price of both companies.

“There’s no question this represents a big acquisition for us,” said Howard Gougeon, vice-president of Breakwater. “But we believe it will significantly increase our earnings and cash flow and provide Breakwater with a diversification into base metals.”

In order to complete its proposed acquisition, Breakwater would have to issue 31.6 million shares, which would roughly double the number of shares currently issued and outstanding. Whether by formal offer or some other arrangement, the company hopes to complete the transaction in March, subject to regulatory and governmental approvals.

Michael Raftery, secretary for American Pacific, told The Northern Miner that Breakwater’s offer is being reviewed by the company’s board of directors. He declined comment on the terms of the offer until such time as a review is completed, but did state that relations between the two companies are currently “friendly.”

Late in 1988, Curragh Resources announced plans to acquire an interest in American Pacific Mining. Although Curragh completed a review of the company’s assets, including El Mochito, the two companies were unable to reach an agreement.

American Pacific Mining acquired El Mochito in 1987 for about US$12 million from a subsidiary of Amax Inc. Although operations were suspended at the time (because of low base metal prices and other factors), American Pacific was able to resume operations in time to benefit from the recent increase in the value of most base metals.

For the six months ended Aug. 31, the El Mochito mine has processed 244,280 tonnes of ore with an average grade of 8.21% zinc, 1.69% lead, and 2.81 oz. silver per ton which represents earnings of $8.85 million.

Total reserves, as of August, 1989, are reported as 5.7 million tonnes averaging 8.40% zinc, 2.14% lead, 2.64 oz. silver and 0.32% copper. El Mochito has a mine life of at least a further 10 years and American Pacific controls a land package in the surrounding area.

Gougeon said key operating officials from Breakwater, including President Brian Pewsey, recently visited the mine site in Honduras and were impressed with American Pacific’s good working relationship with the Honduran government.

El Mochito has supplied metals to world markets since 1948, specifically zinc, lead, silver, copper and minor amounts of gold. To date, the underground mine has been a money-maker for American Pacific. However in the past year, some of this has been plowed back into the aging mine which was in need of some capital improvements and further development work to reach reserves at the lower levels of the deposit.

The mine’s cash flow and profitability are no doubt the main reason that American Pacific has been vulnerable to potential takeovers. But less obvious reasons also apply. The company is widely held with no large controlling shareholders. And since the departure of former president Roy Shipes, the current management team is viewed as lacking in technical strength and operating experience.

Breakwater, on the other hand, is viewed as having a strong operating team but no sizable major projects to operate. The company owns 49% of the Cannon gold mine in Wenatchee, Wash., which has been operated by its joint venture partner. In the past several years Breakwater has been active on a number of projects in Eastern Canada that were acquired through takeovers of Novamin Inc. and Noramco Mining.

Corona currently holds about a 12% interest in Breakwater, making it that company’s largest single shareholder.