Friendly merger promises a new, Intrepid company

Intrepid Mines (IAU-T, IAU-A) and Emperor Mines (EMP-A, EMPMF-O) each have something the other needs.

The companies have agreed to merge, enabling cash-strapped Intrepid to start development at its Casposo gold-silver project in Argentina and to prolong operations at its Paulsens gold mine in Australia with flexible financing options.

Intrepid will also inherit Emperor’s experienced management team to make its exploration and development goals possible.

Meanwhile, Emperor, which has about $64 million (A$70 million) in cash but nowhere to spend it, will acquire a range of projects from early stage exploration to a producing gold mine. It will take on Intrepid’s name as well.

“We looked at thirty-odd opportunities throughout the world and the Intrepid opportunity was head and shoulders above anything else we looked at,” says Emperor CEO Brad Gordon, who will remain in the same role at the new Intrepid.

The deal values Emperor at $62 million — Intrepid will give one of its shares for every 4.25 Emperor shares. DRDGold (DROOY-Q) has agreed to sell its 79% shareholding in Emperor as a part of the arrangement.

Intrepid is eager to start open-pit construction at Casposo as soon as possible with hopes of beginning production by the end of 2009.

The project has reserves of 270,000 oz. gold and 6.6 million oz. silver, and an indicated resource of 368,000 oz. gold and 10.6 million oz. silver. Intrepid expects to produce 68,500 gold-equivalent oz. per year at operating costs of US$248 per oz. Capital costs were estimated at around US$45 million a year ago, but the company says that number has increased.

Intrepid president and CEO Laurence Curtis, who will be the president of the new Intrepid, says there is significant potential to expand beyond the current reserves and resources at Casposo, including underground mining targets, but that will have to wait.

“Our thesis was, ‘Let’s go take this five-year project and start developing it so we can take advantage of the rising gold market,'” Curtis says. “You could spend a lot of time trying to find more and not be where we are now — we are ready to begin engineering.”

Intrepid also has plans to expand resources at its Paulsens mine in Western Australia, which produced 151,000 oz. gold in 2007 at a cash cost of US$357 per oz.

Gordon says that Paulsens’ current two-year mine life could be extended quite easily.

“We want to see Paulsens with a five-year mine life,” Gordon says. “We need to find three years — most people look at the deposit and can see another two fairly quickly, so it’s just another year we need to find.”

Recent infill drilling on the current development level returned a 14-metre intersection grading 49.7 grams gold per tonne, with an estimated true width of 6.5 metres.

Underground extension drilling focusing on the faulted offset of the upper zone, which was identified during 2006 drilling, returned a 12-metre intersection grading 8.95 grams gold per tonne, while the corresponding lower zone returned 1.7 metres grading 15.5 grams gold per tonne.

The merged company also plans to make sure Paulsens is hedge-free and debt-free by the end of 2008. Intrepid has about 41,000 oz. gold hedged and A$11.5 million in debt at the moment.

The two companies will be doing a significant amount of drilling at exploration projects.

Intrepid and joint-venture partner Aura Silver have the option to earn up to 70% on the Taviche silver- gold property in Oaxaca state, Mexico, from Plata Panamerican by spending US$4 million over four years.

The property hosts 20 km of epithermal vein systems, with each vein running up to 2 km long and 10 metres wide. Small-scale miners produced about 19.2 million oz. silver and 144,000 oz. gold between the 1880s and 1942.

Emperor will contribute its Tijuh Bukit property on Java Island, Indonesia. The deposit has a high sulphidation gold-silver system overlying a 3-sq.-km copper system which has been largely untested. The company has an option to earn 70% by spending A$8 million on exploration.

The money to bring these projects forward is coming mostly from Emperor, which has recently emerged from tough times.

The company saved itself financially by selling off its assets last year — most notably its 20% interest in the Porgera gold mine in Papua New Guinea to 75% owner Barrick Gold (ABX-T, ABX-N) for US$250 million.

After clearing its debt and closing out its hedge book, Emperor had $120 million (A$130 million). Another $48 million (A$52 million) went to the shareholders, leaving Emperor with about $64 million (A$70 million) in the bank.

The company was forced to shut down its long-producing Vatakoula mine in Fiji in late 2006, after it hadn’t made a profit in six years.

“There were 2,000 employees in a town of 7,000 people that relied on the company for seventy-five years,” Gordon recalls. “We wanted to continue there, but we were left with little option.”

Emperor had hoped to keep exploring on the property after putting the mine on care and maintenance, but when discussions with the army about closure issues didn’t go well, it took control of Vatakoula.

“A couple truck loads of soliders came in one Saturday night and all our expats ran away,” Gordon says.

Negotiations didn’t pan out, so Emperor left the country, later selling the operation for US$1 to Wes-tech Gold.

In February, Emperor was able to sell off its interest in its Tolukuma gold mine and exploration licences in Papua New Guinea, which had had production problems.

Petromin PNG Holdings acquired mine owner, Tolukuma Gold Mines, for a nominal purchase price, taking on all assets and liabilities of the company.

The merger between Intrepid and Emperor hasn’t yet been finalized, but already Curtis says it outranks past deals by far.

Curtis thought the 2006 merger that he helped orchestrate between Intrepid Minerals and NuStar Mining, (the former owner of Paulsens) was faultless.

“But maybe it wasn’t that perfect,” he says. “I think we lacked the management stamina.”

The chief financial officer and operations manager of the old Intrepid were located in Australia, while Curtis and the company’s vice-president of investor relations were located in Toronto.

“When you are trying to operate across time zones like that and you are not a big company, it’s tough,” Curtis says. “What this does is finally consolidate, gets over the time-line issues.”

Now there are two operations managers — one in Australia and another in Latin America.

Curtis will remain in Toronto, heading up the capital markets office while the head office will be in Brisbane, under Gordon’s watch.

Having both Curtis and Gordon in charge on opposite sides of the world will make things easier, Curtis says.

“The distance was really tough for us,” he says.

The new Intrepid has a lot of work cut out for it across the globe — from Mexico and Argentina to Australia and Indonesia.

The company is also on the lookout for additional acquisitions.

“We didn’t do the merger to sit around as a $120-million-market-cap company,” Gordon says. “We want to do something significant.”