Esperanza’s shareholders embrace Alamos offer

Shareholders of Esperanza Resources (TSXV: EPZ) voted 96.25% in favour of the company’s acquisition by Alamos Gold (TSX: AGI; NYSE: AGI), and the Supreme Court of British Columbia has given its seal of approval to the plan of arrangement.

Alamos says while the transaction represents less than 3% of the company’s market capitalization, it has the potential to grow its production in Mexico by more than 50%.  

Esperanza’s advanced-stage gold project in Mexico’s Morelos state has a measured and indicated resource of 1.5 million oz. gold and 16 million oz. silver, and the open-pit, heap-leach operation is forecast to register all-in sustaining costs of less than US$900 per oz. 

Based on a preliminary economic assessment completed in September 2011, the project has an initial six-year mine life, with expected production of 0.6 million oz. gold at an average rate of 103,000 oz. per year, and average cash costs of US$499 per oz., net of by-product credits.

Management will resubmit Esperanza’s environmental impact assessment (EIA) within the next 18 months.

Under the plan of arrangement, Esperanza shareholders will receive 85¢ in cash for each share of Esperanza held, or a 38% premium to Esperanza’s 30-day, volume-weighted average price for the period ended July 11. On a fully diluted, in-the-money basis, the transaction values Esperanza’s equity at $69.4 million. Esperanza shareholders will also be issued 5 million Alamos warrants in aggregate, and existing Esperanza warrant holders will be given 2 million Alamos warrants in aggregate.

“The company has $445 million in cash post closing of the Esperanza transaction, which should allow it to internally finance development of both the Esperanza and [its] Turkish projects,” writes Brian Quast of BMO Capital Markets. “With the EIA recently received for its Kirazli project in Turkey, Alamos is building a road map for long-term production growth.” 

But the Esperanza project is not without its challenges, Alamos president and CEO John McCluskey confirmed in a telephone interview after the transaction closed. Chief among them is to convince the governor of Morelos that the project is in the best interests of the state, and will be designed and operated at the highest standard.

“The current governor has expressed he is opposed to the mine,” McCluskey says. “But the local community is incredibly supportive and the federal government is supportive of mining, and has been highly encouraging of mine development in excess of a decade.”

He adds that “we have to roll up our sleeves and get to work, and design a really good project that will stand on its merits.” 

In August the state government of Morelos passed a law restricting cyanide use, but didn’t provide details on how such restrictions would be any different than existing federal restrictions on using the chemical.

“The federal government already restricts the use of cyanide in specific ways, and we operate under those restrictions, and so does every other operator in the country,” McCluskey says. “I don’t know of any country in the world that doesn’t have restrictions on cyanide. It is pretty normal.”

McCluskey points out that when Alamos resubmits the EIA for the Esperanza project, it will be submitted to the federal government, not state agencies.  

“I think our job as a company is that we are going to have to engage the governor and demonstrate to him that mining in this state and the specific project is going to be a positive thing for the government and the people.”

At press time Alamos was trading at $17.59 per share within a 52-week range of $10.40 to $19.96. Quast of BMO Capital Markets has an $18 target price on the stock.

David West and Ash Guglani of Salman Partners have a $20 price target. 

“We assume that Alamos has a predetermined plan in place to tackle both the air quality and cyanide issues at the Esperanza gold project, with reasonable expectations for success,” they wrote in a research note after the acquisition closed. “Based on the potential timeline for development, the Esperanza project should be ready for construction closer to the end of the construction period for the company’s Turkish assets.”