Alamos bids $69M for Esperanza Resources

VANCOUVER — Toronto-based producer Alamos Gold (TSX: AGI; NYSE: AGI) looks to have finally nailed down an acquisition in the form of junior explorer Esperanza Resources (TSXV: EPZ) and its wholly owned Esperanza gold-silver project located 110 km south of Mexico City.

It hasn’t been a secret that Alamos is in the market for new gold assets. The company narrowly missed out on Aurizon Mines in the first quarter when U.S. silver producer Hecla Mining (NYSE: HL) swept in with a richer bid valued at $796 million.

But Alamos remains flush with cash — having reported $480 million in cash and equivalents in early May — and it was just a matter of time before the company moved forward with a back-up plan. In addition, since Alamos’ bid for Esperanza is valued at just $69 million, it leaves the company with the  flexibility to jump on other opportunities that may emerge.

Under the friendly agreement,  Esperanza shareholders would receive 85¢ in cash for each share held, or a premium of 38% on Esperanza’s 30-day, volume-weighted average stock price. Esperanza shareholders would also receive 0.0625 of a warrant to buy Alamos shares at an exercise price of $29.48 — a right which would expire in May 2017 — while each Esperanza warrant holder would receive 0.15 of a warrant to buy Alamos shares under the same conditions.

“Esperanza is an excellent strategic fit within our existing portfolio and in our view, is one of the best undeveloped opportunities and significant open-pit targets in Mexico,” says Alamos president and CEO John McCluskey, emphasizing that the transaction represents less than 5% of his company’s market capitalization.

“We have followed Esperanza’s progress for some time and see this as a truly compelling opportunity for our shareholders. It has the potential to grow our production in Mexico by more than [50%],” he adds.

As part of the Alamos deal, Esperanza will exercise its right to terminate a pending agreement with producer Pan American Silver (TSX: PAA; NASDAQ: PAAS) to acquire the advanced-stage La Bolsa gold project in Sonora, Mexico, as well as two more earlier-stage projects in Peru and Argentina. The share-based deal would have seen Pan American own 48% of Esperanza.

Esperanza last completed a preliminary economic assessment (PEA) on the project — formerly called Cerro Jumil — in September 2011. The company modelled an open-pit, heap-leach mine that would carry a US$114-million price tag and produce around 103,000 oz. gold annually over a six-year life at cash costs of US$499 per oz. net of by-product credits.

Based on a US$1,150 per oz. gold price, Esperanza’s PEA base case carries an after-tax internal rate of return of 26% and an after-tax 5% net present value in excess of $122 million.

Esperanza is a highly oxidized gold-silver skarn deposit that hosts 50.3 million measured and indicated tonnes grading 0.9 gram gold per tonne and 9.9 grams silver per tonne, for 1.47 million contained oz. gold and 16 million contained oz. silver. The project holds another 7.9 million inferred tonnes averaging 0.66 gram gold and 10.9 grams silver for 170,000 contained oz. gold and 2.8 million contained oz. silver.

It was just over a month ago that Esperanza learned that the Mexican federal permitting authority had denied an environmental impact assessment (EIA) for the project based on discrepancies in climate and hydrogeological assessments. The problems with Esperanza’s EIA are by no means insurmountable, however, and an experienced miner like Alamos should have a better shot at scoring the requisite permits.

But the project’s recent permitting woes gave Alamos an opportunity to grab the asset at a lower cost. Esperanza had been down 26% — or 21¢ per share — in the four weeks since the EIA hiccup was announced. The company’s struggles since the beginning of the year have been even more pronounced, with its stock dropping 62% since early January, en route to a 52-week low of 48¢ per share in late June.

“This transaction provides an attractive and immediate premium to our shareholders,” says Esperanza president and CEO Greg Smith. “Further, the cash consideration provides liquidity and value certainty, while the warrants ensure Esperanza shareholders will retain exposure to the success of the Esperanza gold project going forward. [Alamos] is an industry leader, with substantial experience operating in Mexico and the financial and technical capacity to continue advancing [the project].”

Alamos operates its flagship Mulatos gold mine in Mexico and is advancing its resource-stage, gold-silver assets in Turkey — namely Kirazli and Agi Dagi. 

BMO Capital Markets analyst Brian Quast estimates that the earliest production at Esperanza would be in 2016.

Shares of Alamos dropped 4%, or 51¢ after news of the acquisition, en route to a $13.41 close at press time. The company maintains 128 million shares outstanding for a $1.7-billion market capitalization.

Esperanza’s shares rose 36%, or 24¢, following the news to settle at the bid price. 

Esperanza closed at 90¢ per share and maintains 79 million shares outstanding for a $69-million market capitalization.