Capital Gold spurns Timmins Gold for Gammon Gold (October 11, 2010)

In the same week that the board of Capital Gold (CGC-T, CGC-X) rejected a merger proposal from Timmins Gold (TMM-V), the New York-headquartered gold producer signed a definitive merger agreement with Gammon Gold (GAM-T, GRS-N).

The boards of both companies unanimously have agreed to the combination, which will see Gammon Gold buy 100% of Capital Gold in a cash-and-share transaction valued at US$288 million or US$4.57 per share of Capital Gold.

Under the proposal each Capital Gold share will be exchanged for 0.5209 of a Gammon Gold share and a cash payment of US79¢. The acquisition price represents a 20% premium to the closing price of Capital Gold’s shares in New York on Sept. 24, and a 30% premium to its 20-day volume-weighted average price.

If shareholders approve the transaction later this year, Capital Gold shareholders will own about 20% of Gammon Gold on a fully diluted basis.

By contrast, Timmins Gold’s offer for Capital Gold on Aug. 31 was based on a value of $4.50 per share of Capital Gold, or a share exchange ratio of 2.27 Timmins Gold shares for each share of Capital Gold, representing a 26% premium to the 20- day volume-weighted average price of Capital Gold shares for the period ended Aug. 31.

Capital Gold announced on Sept. 27 that the Timmins proposal was not in the best interests of its share holders.

Capital Gold owns 100% of the El Chanate open-pit gold mine near the town of Caborca in Sonora, Mexico, which has been profitable since its first gold pour three years ago. The company transformed El Chanate from a small exploration property to a low-cost producing asset and since 2002 has increased its reserves by 1.3 million gold oz., or about 535%.

The mine produced 15,287 oz. gold in the fourth fiscal quarter ended July 31, a 40% increase over the previous quarter, and is forecast to produce between 65,000 and 70,000 oz. gold in fiscal 2011.

Capital Gold also owns the Orion development project in the Mexican state of Nayarit, as well as mineral concessions near the town of Saric, in Sonora, where it is exploring for gold and silver.

For its part, Gammon Gold has a 100% interest in the Ocampo gold-silver project in the Sierra Madre Occidental in Mexico’s Chihuahua state. The Ocampo mine is one of the largest operating gold-silver mines in the state and the property covers more than 120 sq. km. Ocampo consists of an open pit and an underground mine with milling and crushing/heap leach processing facilities. Gammon Gold became active in the area when foreign ownership restrictions were lifted in the late 1990s and has been actively exploring the area since 1999.

Gammon Gold also owns the El Cubo-Las Torres mine complex in Guanajuato state. El Cubo leases the Las Torres mine complex adjacent to the El Cubo mine from a subsidiary of Industrias Penoles.

In a conference call on Oct. 1, Stephen Cooper, chairman of Capital Gold, explained that the merger with Gammon Gold would give shareholders “the opportunity to participate in a well-funded, high-quality and growing gold producer.”

It will “provide greater research coverage and trading liquidity and Gammon’s strong balance sheet will allow us to continue to push on operational efficiencies and expansion at Chanate and accelerate exploration activities at both Saric and Orion,” Cooper told analysts and investors.

The synergies he outlined included taking advantage of Gammon Gold’s excess mining capacity and fast tracking the evaluation of Orion. “We’ll also be able to take advantage of Gammon’s experience with underground mining at the Orion prospect” but also its experience with heap-leach pads at the Chanate mine.

Rene Marion, Gammon Gold’s president and chief executive, described the rationale as “obvious” because it would establish Gammon as a leading gold producer in Mexico, with a diversified portfolio of mines and development exploration projects.

“It positions us to lead the consolidation of Mexican gold opportunities,” he said, adding that according to Mexican statistics on mining claims, Canadian mining companies account for about 76% of all mining in the country, including 41 Canadian-owned mines and another 500 projects. “It is time to consolidate,” he concluded.

Marion also pointed out that before the end of next year Gammon will have three 100-tonne trucks, one 992 loader and one rotary drill available to move from Ocampo to El Chanate valued at more than $8 million, with a further five trucks available to move to El Chanate by 2013 at a value of $7 million.

Marion explained that he saw opportunities to reconfigure the heap-leach strategy at El Chanate and better optimize recoveries.

At Orion, meanwhile, Gammon’s expertise in underground mining would be a big plus, and contractors from the El Cubo mine can be moved over to Orion with some equipment to start development and test stoping for a bulk sample early next year. “That would allow us through metallurgical testing to review opportunities that El Cubo affords us with excess mill infrastructure,” he said. “We have excess mill capacity at El Cubo that is capable of processing upwards to 1,100 tonnes per day.”

Marion noted that the merger would see Gammon becoming “the largest gold producer amongst our peers,” in Mexico and having “the largest gold reserves and by far the lowest cash costs amongst our peers.”

When asked why Capital Gold decided to go with Gammon’s offer rather than the offer from Timmins Gold, Cooper said he couldn’t comment on the Timmins offer specifically but said the board felt that “Gammon came out on top pretty much in all areas” and said it was “the long-term opportunity” that appealed to them.

When pressed for examples, Coopers said: “The ability to move equipment is a big issue for us. The ability to take advantage of the expertise that Gammon has in heap-leaching, because it has been a challenge to us in the past, and the experience they can bring with underground mining to Nayarit.”

At presstime in Toronto, Capital Gold shares were $4.80. It has a 52-week trading range of $2.56- $5.05 and 61.2 million shares outstanding.

Gammon Gold shares were $7, trading within a 52-week range of $5.42-$13.19 with 138.8 million shares outstanding.