Elgin’s bid for Gold-Ore to create new Arctic gold producer

With gold equities having largely underperformed for more than a year despite gold prices hitting a series of new all-time highs, many predict a fresh wave of M&A activity for the gold sector in 2012, arguing it now represents one of the cheapest and quickest ways for companies to acquire new ounces.

Nevertheless, shareholders’ initial reaction to Elgin Mining‘s (ELG-V) all-share, friendly takeover offer on Feb. 1 for junior gold miner Gold-Ore Resources (GOZ-T) puts that theory to the test, with Elgin shares falling down 19%, or 23¢, to hit $1 following the announcement.

Elgin would issue 85 million new shares to existing Gold-Ore shareholders in a one-for-one deal that values its target at $103 million, or $1.22 a share. It represents a 66% premium to Gold-Ore’s closing price of 75¢ prior to the offer and is nearly 10 times the company’s net earnings last year. 

Gold-Ore, with its low-grade, high-cost Bjorkdal gold mine in Sweden, earned $10.2 million in 2011 on production of 40,338 oz. gold,  up from 2010’s $6.7 million profit on  production of 41,051 oz. gold. 

Taking into account Bjorkdal’s 1.5 million oz. in measured, indicated and inferred gold resources, plus its 166,000 oz. in proven and probable gold reserves, Elgin is paying around $60 an oz. for the deposit and mine infrastructure.

As Patrick Downey, Elgin’s president and CEO, explained in a conference call and press release, the company sees this as “our first stage of growth: it expands our team, maintains our low-risk profile, and gives us the financial leverage and muscle to accelerate our growth plan as we go forward . . . Gold-Ore’s Bjorkdal mine will provide meaningful cash flow which will fund the company’s future exploration and development activities.”

With Elgin’s past-producing Lupin gold mine in Nunavut expected to come on-stream in 2014, Downey says gold production from the combined company will eventually be well over 100,000 oz., creating a strong junior gold producer with two mines in the Far North.

“Bjorkdal is an Arctic project, although having visited, it’s not truly Arctic – it’s thirty kilometres from the ocean and it’s quite pleasant,” Downey chuckled. “But, the [Gold-Ore staff] do have underground and open-pit experience in cold weather and that does bring a level of knowledge to our team.”

Bjorkdal now gets about half of its production from open-pit mining with the other half coming from underground. Though it only has about 3.5 years of proven and probable reserves left, Gold-Ore execs say the two-decades-old mine has had a strong record of replacing reserves over its life. 

For 2012, they expect gold production to remain about the same, roughly 40,000 oz. gold. Cash operating costs for 2011 have yet to be disclosed but are expected to come in around US$900 per oz. 

During the conference call, Downey acknowledged that Elgin’s board made its decision based on Bjorkdal’s current output levels, but Elgin hopes it will be able to lower cash costs at the mine and boost production slightly.

“We see that there is significant potential to, number one, reduce dilution and get a higher mill feed,” said Downey. “We also see that there are a lot of veins here, so with a little bit different mine planning, we can reschedule things . . . Optimally it should be a 50,000-oz.-a-year gold producer. At one time it produced 90,000 oz. per year.”

Elgin will also assess whether it could replace the contract miners and equipment at its open-pit operation with its own fleet.

The deal with Elgin means Gold-Ore will not be going ahead with a previous agreement to merge with Europe-focused gold junior Astur Gold (AST-V), which will result in a $2.5-million break fee being paid, as Astur has notified Gold-Ore it would not be exercising its right to match the offer

Gold-Ore’s chairman Glen Dickson described the Elgin offer as superior while noting that Elgin “brings a near-term development project in an area of low political risk, low capital risk and no permitting risk. This is exactly what Gold-Ore has been seeking for some time now. But also, and equally importantly, we’re very excited about having the Elgin management team with its proven track record working with us to optimize our mining operation.”

The two companies will have about $35 million in cash on hand after combining and a market capitalization around $175 million.

The focus of 2012 will be on advancing Elgin’s Lupin gold project, which produced 3.5 million oz. gold under Echo Bay Mines and Kinross Gold (kgc-t, kgc-n) before closing in 2003 owing to low gold prices. 

This summer Elgin plans on putting the mill back together with a small crew, as well as completing drilling to define a National Instrument 43-101-compliant resource.

So far, internal studies estimate a potential restart around May 2004 at a throughput rate of 1,000 tonnes per day, with an average head grade of 9 grams gold per tonne.

Downey reckons the operation could produce 80,000 to 90,000 oz. gold each year. “It’s a very well-understood, very continuous type of orebody that’s still open in several areas,” he said, emphasizing that the project is already fully permitted for mining, and that the company just has to “give 60 days notice and we’re off to the races.”

Elgin plans to further explore another high-grade Nunavut gold project named Ulu, located about 150 km north of Lupin. 

A successful acquisition would mean Elgin’s total outstanding shares would rise to 147 million from 55 million, of which 10 million would be held by Elgin directors.

Former Kinross CEO Bob Buchan would remain Elgin chairman, and Downey would continue in his role as president and CEO. Gold-Ore’s Robert Wasylyshyn would take the role of chief operations officer, while four Gold-Ore directors would join the Elgin board.