Sierra Minerals to merge with Goldgroup Resources

Shareholders have given the go-ahead for Sierra Minerals (SIM-T) and privately held Goldgroup Resources to combine their assets in Mexico in a merger they hope will create an intermediate gold producer with annual production within three years of 200,000 oz. gold.

The merger will combine Sierra’s Cerro Colorado producing gold mine in Mexico’s Sonora state with Goldgroup’s development- and exploration-stage gold projects, also in Mexico.

Last year Cerro Colorado produced between 20,000 and 21,000 oz. gold and this year is on target to produce between 25,000 and 30,000 oz. gold. Management at Toronto-headquartered Sierra Minerals believe the mine is capable of producing 30,000 oz. gold annually over a period of four to five years.

Vancouver-based Goldgroup brings with it three development-stage projects and three exploration stage projects, also in Mexico. The most advanced stage project is the El Porvenir property that it acquired from Goldcorp (G-T,GG-N) in 2007.

Goldgroup is finalizing metallurgical test work as part of an internal economic assessment and expects to make a positive production decision within the next six months. The company believes that with a 70:1 silver:gold ratio, El Porvenir can produce about 50,000 gold-equivalent oz. a year.

The company’s other development-stage projects are its 200 sq. km Caballo Blanco property in Veracruz and the San Jose de Gracia project in Sinaloa.

Goldgroup holds a 70% interest in Caballo Blanco, which it purchased from NGEx Resources, the primary exploration unit of the Lundin Group, for $6 million in cash, 9 million shares of Goldgroup and a 1.5% net smelter return on future mine production and a one-time royalty payment of $5 million. The remaining 30% of the project is owned by Almaden Minerals.

It has a 25% stake in the San Jose de Gracia project with an option to earn an additional 25% stake by spending about US$6 million by March 15, 2011. The high-grade advanced exploration project, at a cutoff grade of 2 grams gold per tonne, has an inferred resource of 3.44 million tonnes grading 5.59 grams gold per tonne for contained gold of 618,000 oz., and 10.02 grams silver per tonne for contained silver of 1.11 million oz.

Goldgroup also has three early stage exploration projects in the Sierra Madre mineral belt. It has the option to earn up to a 70% interest from Goldcorp in the El Candelero property, a 25,000 hectare piece of land lying within 10 km of Goldcorp’s Tayoltita mine. (Goldcorp retains its back-in right to increase its interest to 60%.)

Goldcroup also holds a 90% interest in the Kenya property, 50 km eat of the San Jose de Gracia property and El Cajon, a new grassroots gold discovery about 12 km from the Cerro Colorado mine.

Michael H. Farrant, Sierra’s president and chief executive, said the new company will be “one of the best publicly traded junior Mexican gold producers” and will be “significantly undervalued relative to a number of its peers.”

Under the arrangement, Goldgroup shareholders will receive one post-consolidation share of Sierra (being shares of Sierra consolidated on a 2.85:1 basis) for each share of Goldgroup held.

The ne entity will be renamed Goldgroup Mining and will trade under the new ticker symbol of (GGA-T).

Shares of the combined company are expected to begin trading on a consolidated basis along with the corresponding adjustment in share price, on or about May 6.

At presstime Sierra minerals was trading at 33.5¢ per share. Over the last year the company has traded in a range of 11.5¢-39¢ per share and has 90.3 million shares outstanding.