Esperanza inks major deal with Pan American Silver

VANCOUVER — In one fell swoop, Esperanza Resources (EPZ-V) has gained three advanced-stage gold projects, $35 million in funding and a new major shareholder in a deal with Pan American Silver (PAA-T, PAAS-Q) that vaults the junior ahead in its mission to become a mid-tier gold producer.

Pan American took over Minefinders in early 2012 to gets hands on the Dolores silver mine, but it also took on Minefinders’ earlier-stage assets. One of those was the La Bolsa gold project, a small but construction-ready gold oxide deposit in Mexico. Similarly, Pan American bought out Aquiline Resources in early 2010 for the Navidad project, but the deal also added the Calcatreu project in Argen­tina and the Pico Machay project in Peru to Pan America’s portfolio.

All three are advanced-stage projects with good resources and healthy economics, but they are too small for a major like Pan American. They needed a smaller company that would start by building small, low-cost mines that could expose some of the projects’ future upside.

Esperanza Resources is a company with precisely that goal. In addition, half of Esperanza’s management team came from Minefinders, which means they already know the folks at Pan American, and are familiar with La Bolsa. It was the perfect match, and out of that match came a dream deal for Esperanza.

For just 50.9 million shares and 10 million warrants, Esperanza is buying La Bolsa, Pico Machay and Calcatreu from Pan American. Each warrant can be exercised for $1.80 into a full Esperanza share until May 2017. If Pan American exercises all 10 million warrants it would add $18 million to Esperanza’s coffers.

Pan American is also subscribing for 20.6 million Esperanza shares at $1.70 apiece, which represents a 29% premium to the junior’s 20-day, volume-weighted average share price, and a 48% premium to the company’s share price the day before the deal was announced. This transaction will put $35 million into Esperanza’s bank account, which would help build La Bolsa.

“We are excited to launch Esperanza on a path to becoming a profitable, mid-tier gold producer,” Esperanza president and CEO Greg Smith says. “This transaction provides a clear path to profitable production with the addition of La Bolsa, a project that complements our flagship Esperanza project very well.”

The private placement will also position Pan American as Esperanza’s largest shareholder. When the placement closes Pan American will own 20.7% of Esperanza’s outstanding share count. If Pan American exercised all of its Esperanza warrants its ownership in the junior would climb to 28%. Three Pan American representatives — president and CEO Geoff Burns, chief operating officer Steve Busby, and executive vice-president Michael Steinmann — will also join Esperanza’s board of directors.
On top of being Esperanza’s largest shareholder, Pan American might become the junior’s bank: the major is providing Esperanza with a $15-million stand­by convertible credit facility. If Esperanza needs additional funds to get La Bolsa built, it could draw from the facility any time over the next 24 months.

Esperanza may not need to tap into the credit facility. The $35 million it gained in the private placement might be enough to build its first mine, as a 2010 prefeasibility study pegged the costs to develop La Bolsa at just $31.4 million.

La Bolsa is home to an oxidized blanket of gold-silver mineralization that contains 15.6 million proven-and-probable tonnes grading 0.63 gram gold per tonne and 9 grams silver per tonne. This reserve is enough to feed an 8,500-tonne-per-day open-pit mine for six years, though Esperanza is optimistic the mine life can be extended through additional drilling, as the deposit remains open both downdip and along strike.

The planned mine at La Bolsa would produce 40,000 oz. gold and 52,000 oz. silver annually. Silver output is constrained by the mineralization type, which limits silver recovery to just 7%. Gold recoveries are expected to average 72% using carbon-adsorption recovery.

La Bolsa would produce an ounce of gold for US$510, net of silver credits. Using a gold price of US$1,200 per oz., a silver price of US$18 per oz. and a 5% discount rate, La Bolsa carries a pre-tax net present value of US$91.3 million, and is expected to generate a 34% pre-tax internal rate of return.

Minefinders was primed to start construction at La Bolsa when it was acquired by Pan American. Now Esperanza is taking up the cause — and it should be a speedy effort, as La Bolsa is fully permitted for construction.

“La Bolsa enjoys low capital and operating costs and has an attractive rate of return,” Smith says. “La Bolsa could be a relatively low-risk entry point for Esperanza as we move towards becoming a producer . . . we could be producing gold from La Bolsa in the first half of 2014.”

An operational gold mine at La Bolsa would generate cash flow that Esperanza could use to fund construction of its heretofore flagship project, the Esperanza project in Mexico. The company plans to develop the oxidized gold-silver skarn deposit at its namesake project into an open-pit, heap-leach operation. A feasibility study is underway.

Next up in Esperanza’s newly expanded project pipeline is Cal­catreu, a high-grade epithermal gold-silver project in Rio Negro, Argen­tina. A previous owner advanced Calcatreu to feasibility level in 2005, with a study that showed positive economics. But the project was forced to the back burner when the Rio Negro government banned cyanide use, which is needed to recover precious metals from the rocks at Calcatreu.

All that changed in January 2012, when the government lifted its cyanide ban. Now Esperanza plans to start afresh, with new exploration aimed at expanding the deposit. Resources stand at 8 million indicated tonnes grading 2.63 grams gold and 26 grams silver, plus 3.4 million inferred tonnes grading 2.06 grams gold and 17 grams silver. The primary vein system remains open downdip, and the structure hosting it remains open along strike.

“We believe Calcatreu has significant potential for expansion,” Smith says. “However, given the inflationary environment in Argentina right now, we believe this is a longer-term project for Esperanza.”

The third project in the Pan American deal, Pico Machay, is an epithermal gold deposit in the Huancavelica department of southern Peru. Pico Machay is the least advanced of the three, but Smith says they are more than happy to have the project in Esperanza’s pipeline.

“Pico Machay will not be a focus for us right away, but it is a great project,” Smith says. “It is in a good area in Peru, a pro-mining area with good infrastructure. We will start by drilling and working on a preliminary economic assessment, and go from there.”

News of the Pan American deal added 14¢ to Esperanza’s share price, lifting it to $1.29. The company has a 52-week trading range of 99¢ to $1.70, and 78.8 million shares outstanding.