Aurogin, Morgain combo falls flat with investors

In a move that may become increasingly common in the junior gold sector, Aurogin Resources (AUQ-V, AROG-O) and Morgain Minerals (MGM-V, MGIMF-O) are joining forces to create an emerging gold producer, though shareholders have yet to be sold on the benefits of the plan.

“The consolidation of smaller companies is inevitable,” Gordon Bogden, managing director of National Bank Financial, told delegates at the recent Prospectors and Developers conference in Toronto.

Bogden says that accelerated M&A activity among the sector’s mid-cap and senior companies has left a void that needs to be filled.

Other recently announced mergers among gold juniors include: Royal Gold’s (RGL-T, RGLD-Q) friendly takeover bid for royalty and exploration company Battle Mountain Gold Exploration (BMGX-O); Queenstake Resources’ (QRL-T, QEE-X) proposed merger with YGC Resources (YGC-T, YGCFF-O); and Exall Resources’ merger with Southern Star Resources to create Gold Eagle Mines (GEA-T), a company that will hold a 100% stake in the Gold Eagle property near Red Lake, Ont.

Under the Aurogin-Morgain deal, the merged company will have two operating mines in Guatemala and Mexico by the end of the year and some advanced projects in the pipeline that are expected to boost annual production to 100,000 oz. within three years from 35,000 oz. this year.

The “merger of equals” will give shareholders one share of the new company in exchange for every two shares of either Aurogin or Morgain. Both companies hope to hold a vote on the merger in June.

So far, though, rather than embrace the plan and its potential to increase shareholder value, disgruntled investors have pummelled the stock of both juniors. During the first three weeks of March, Aurogin shares dropped from 38.5 to 27 while Morgain was off 9 to 28. Each company has 65-70 million shares outstanding.

The sell-off was driven by shareholders expecting a full buy-out with a premium attached that were disappointed when they got a share rollback instead, Aurogin chief financial officer Michael Farrant told The Northern Miner during a conference call with management of both companies.

But the logic behind the rollback was to tighten up the number of shares outstanding before scouting for new acquisitions that will require issuing more shares, a key component of the new company’s growth strategy. Farrant also points out that the new company will have twice the production, twice the reserves and resources and twice the cash flow of its predecessors.

Another motive behind the merger is to move onto the radar screens of institutional investors that would consider the individual companies too small to be worthy of investment.

“We think that if we just get the valuations that the market gives all the other companies that are of similar size and similar profile, we will be trading a lot higher than we currently are,” Farrant says. He values the new company at roughly $120 million based on almost 2 million oz. in the ground at a cutoff grade of 0.45 gram per tonne, assuming a value of US$55-US$65 per oz.

Toronto-based Aurogin owns 50% of the small Sastre open-pit mine in central Guatemala, which poured its first gold in December and recently ramped up to full production of 20,000-30,000 oz. per year. Cash costs are expected to be less than US$200 per oz., while the actual production rate will depend on the average grade, which varies from 2.5 to 4 grams gold.

Morgain, based in Vancouver, owns the Castillo gold project in Mexico’s Durango state. El Castillo contains measured and indicated resources of 58 million tonnes grading 0.54 gram gold, or 1 million contained ounces. Production is expected to begin in the third quarter, with a ramp up to full production of 30,000 oz. by the end of the year.

Morgain, which took on $5.9 million in debt to finance the development of Castillo, expects to receive a key environmental permit for the mine by April, at which point the company will begin construction. Life-of-mine cash costs are estimated to average US$337 per oz. Production for this year will be about 10,000 oz. gold.

Project pipeline

The next project slated for development is La Fortuna in Mexico, which Morgain acquired from Alamos Gold (AGI-T, AGIGF-O) last year in exchange for 5 million shares. La Fortuna is a high-grade gold-silver deposit with a historical resource of 4.5 million tonnes averaging 2.25 grams gold per tonne and 34.8 grams silver. Morgain is currently working to upgrade the resource to National Instrument 43-101 standards.

Aurogin’s Sastre concession in Guatemala also contains a number of small deposits other than the Main Zone that could be put into production quickly once 43-101-compliant reserves are established. These include Lupita, Bridge and El Arenal. Aurogin is spending about $300,000 to put together a three-dimensional geological model of the whole area based on previous work, a better understanding of the mineralized zones from the Main Zone mining, and surface trenching and drilling.

Though management is more focused on development than exploration at the moment, Aurogin is expected to launch a 6-hole drill program on the Lone Mountain project on the Battle Mountain-Cortez gold trend in Nevada as soon as drills are available. The target is a high-angle structure, similar to the one associated with Barrick Gold’s Archimedes deposit to the southeast, which runs parallel to a surface geochemical anomaly.

The merged company will also look to acquire other advanced properties in Central America and Mexico that are amenable to heap leaching, but are too small to attract the interest of majors.

“There is going to be tremendous opportunity to develop these advanced-stage projects,” says Darren Koningen, vice-president engineering for Aurogin and Morgain. “The key is to have the people available to do the design and construction yourself so that you can keep costs way down.”

The combined management group does have impressive credentials when it comes to managing heap-leach gold operations in the Americas.

Chris Babcock, who will be president and CEO, has 20 years’ experience in the gold mining industry, including 14 years in Mexico managing heap-leach operations, most recently for Alamos.

Chester Millar, a pioneer in heap-leaching techniques who will serve as chairman, has held top management positions at several gold producers including Alamos, Glamis Gold and Eldorado Gold (ELD-T, EGO-X).

Farrant, the proposed chief financial officer, has 10 years experience in gold mining, mostly with majors. He was corporate controller for Barrick Gold (ABX-T, ABX-N), and served as operations controller and finally vice-president and treasurer of Kinross Gold (K-T, KGC-N).

“This company is very different than most of the other juniors in that the management group we have in place are people whose experience is in building mines and going into production,” Koningen says. “It is not a geologically based group as is so common with a lot of the other small companies.”

— The author is a freelance writer specializing in mining issues, and principal of Toronto-based GeoPen Communications. (www.geopen.com).