Two suitors court Carlisle

Just two days after the ink dried on a binding joint-venture agreement between Canadian gold miner AuRico Gold (TSX: AUQ; NYSE: AUQ; CGJ) and Carlisle Goldfields (TSX: CGJ; US-OTC: CGJCF) on the junior’s Lynn Lake project in Manitoba, Russian gold miner Nordgold (LSE: NORD) declared it wanted to buy Carlisle for $27.3 million (US$24 million) in cash.

Nordgold — the owner of nine mines and a portfolio of development and exploration projects across Russia, Kazakhstan, Burkina Faso, Guinea and French Guiana — requested consent from Carlisle’s board to submit an offer to its shareholders to acquire the company for 9.4¢ per share — a 140% premium to Carlisle’s closing share price of 4¢ per share on Nov. 11.

Nordgold said in a press release on Nov. 13 that it needs approval from Carlisle because it is subject to contractual restrictions that preclude it from making an offer to the company’s shareholders without its consent.

Several months ago Nordgold and Carlisle signed a Mutual Confidentiality Agreement in which “both companies agreed that for a period of two years, neither party would, without the express written consent of the other party, among other things, offer to acquire or announce an intention to offer to acquire or effect a takeover bid, of the other party,” Carlisle says.

“It’s a CA with a standstill,” Abraham Drost, Carlisle’s president and CEO, explained in an email to The Northern Miner.

Carlisle said in a press release that it is “reviewing Nordgold’s request and its contractual obligations under the MCA and its agreements with other parties and intends to respond to Nordgold in due course.”

In an interview before Nordgold made its intentions public, AuRico’s president and CEO, Scott Perry, said his management team had looked at the Lynn Lake gold project for the last six months and liked what it saw.  

“It’s definitely early days, but Carlisle has already delineated 5 million oz. resources on their property, they’ve published a preliminary economic assessment, and if you look at some of the highlights it’s pretty impressive,” he said. “We just think it’s got a lot of things going for it.”

A preliminary economic assessment of the project in February outlined a 12-year operation based on two of Lynn Lake’s four known gold deposits, with production of 145,000 oz. gold a year at all-in sustaining costs of US$700 per oz., average open-pit grades of 2.2 grams gold per tonne, and a US$185-million price tag.

Among the project’s unique attributes are Manitoba’s extremely low electric-power costs of 2.6¢ per kilowatt hour, which will have a significant impact on operating costs. “Manitoba has got Quebec trumped,” Perry said. “Electric power costs there are among the lowest in North America.”

On Nov. 11, AuRico subscribed for 70.6 million common shares in Carlisle — or 19.9% of the company for $5.6 million at 8¢ per share, in a 100% premium to Carlisle’s closing share price on Nov. 10 — and signed a joint-venture agreement to earn a 25% stake in the Lynn Lake gold camp for an initial $5-million cash contribution. AuRico also has the option to earn up to another 35% interest by spending $20 million over three years and delivering a feasibility study. In addition, exploration beyond the scope of the feasibility study would be operated by Carlisle and funded equally by AuRico and Carlisle with a maximum contribution of $2 million per year from AuRico unless otherwise agreed by the parties.  

Perry said the timing of the investment was perfect, given the prevailing “low valuations” in the industry, and is consistent with the company’s focus on high-quality assets in North America. AuRico sold a lot of its non-core operations in 2012 when the gold price was high, he explained, and now that the gold price is under pressure, it’s the ideal time to buy assets that will deliver long-term value.

“You’ve got to buy low and sell high, and it was a good time to move on an opportunity like this,” he said. “Our technical team looked at a lot of things, but this is one opportunity where we quickly established a consensus that it has a lot of potential moving forward.”

Lynn Lake’s location in Canada was a big drawing card, too. “One of the things we like about Canada is that if you are conservative or negative on the gold price, you usually do see compensating relief on the exchange rate,” Perry explained. “At the start of the year the Canadian dollar gold price was $1,300 per oz., and today the Canadian gold price is still $1,300 per oz. That really helps us out at Young-Davidson and will also be part of that dynamic at Lynn Lake.”

Under the terms of the AuRico-Carlisle agreement, the joint-venture ground applies to Carlisle’s entire 350 sq. km land package in the Lynn Lake gold camp, which contains four near-surface gold deposits: the advanced-stage Farley Lake and MacLellan deposits (both past producers that are the subject of Carlisle’s most recent PEA and located within a 40 km radius of each other), and the earlier-stage Burnt Timber and Linkwood deposits. In addition, there are a number of other gold showings on the Carlisle property, Carlisle’s Drost said in an interview before the Nordgold announcement.

“We have over 20 gold occurrences that are known in the belt that have had little testing beyond a first-phase of historical exploration that preceded Carlisle’s involvement on the property,” Drost said.  

Carlisle envisions building a central mill that would initially process feed from the past-producing MacLellan and Farley Lake deposits. The mill would then reduce the hurdle rate if the company develops ancillary assets like Burnt Timber and Linkwood, or any other new deposits discovered on the property, Drost said.

The Farley Lake mine was put into production under previous owners as two small open pits in 1997–99. The pits produced 1.7 million tonnes at a grade of 4.23 grams gold per tonne for 213,124 oz. gold.  MacLellan was previously mined underground between 1987 and 1989 and produced 144,000 oz. gold and 432,000 oz. silver. 

As far as the new partnership with AuRico is concerned, Drost said there is “good chemistry” between the two management groups, and called AuRico’s team “the right guys for the job.”  

“AuRico has a very competent technical group of engineers and geologists [and] runs a lean, low-cost operation at Young-Davidson,” Drost said. “They’re confident professionals — with personality — so we find that we get along with them well, which makes things smoother. More importantly, we’re confident they’re going to come up with the right approach to mining Lynn Lake.”

Commenting on the AuRico-Carlisle deal in a research note, Brian Quast of BMO Capital Markets noted that AuRico was “acquiring a strategic interest in a prospective mining district with a good location and a meaningful resource for a low price.”

“With the ramp-up at Young-Davidson expected to be completed in late 2016,” Quast wrote, “AuRico needs to begin formulating its plan for its next leg of growth.”

As for Nordgold, the Russian mining company believes Carlisle’s Lynn Lake project fits its “strict criteria” for greenfield projects, which include high-grade, non-refractory o
re amenable to open-pit mining, proximity to existing infrastructure and a mining friendly jurisdiction.

The Russian miner said its offer would be subject to Carlisle’s transaction ending with AuRico Gold. Nordgold also said that it had “advised” the Toronto Stock Exchange that the AuRico deal should be subject to the approval of Carlisle shareholders, because the terms of the transaction “effectively constitutes a change of control of Carlisle, and failure to submit it to shareholders for their approval would significantly and adversely affect the quality of the marketplace provided by the TSX.”

In a research note, analyst Mick Carew of Haywood Securities said he views the Nordgold offer (subject to shareholder approval) as “an attractive alternative to the AuRico strategic partnership,” but also pointed out that Nordgold’s all-in cash offer “does not expose Carlisle shareholders to any potential upside the Lynn Lake project may provide through the earn-in option with AuRico. The earn-in option would see AuRico fund the project to feasibility while avoiding diluting Carlisle shareholders.”

Last year Nordgold produced 924,000 oz. gold at a total cash cost of US$819 per oz. In 2012 it produced 717,000 oz. gold at a total cash cost of US$836 per oz.