Lupaka and Andean propose merger

Board members at both Lupaka Gold Corp. (LPK-T) and Andean American Gold Corp. (AAG-V) are unanimously backing a proposed merger of the two companies that would create a Peru-focused gold explorer and developer with combined resources of 2.1 million ounces of gold equivalent in the measured and indicated category and 0.9 million ounces of gold equivalent in the inferred.

Each company would bring significant assets to the table.

Andean American contributes near-term underground gold and poly-metallic development potential at its Invicta project, where an updated resource estimate in April outlined 967,000 gold-equivalent ounces in the measured and indicated category and an additional 236,000 gold-equivalent ounces of inferred at a 1.30 gram gold-equivalent cut-off grade. (An upgraded feasibility study was suspended in October 2011 to conserve cash and take advantage of merger and acquisition opportunities.) So far Andean has completed one of three community agreements at Invicta with local groups.

In addition, Andean American brings a 17% strategic stake in Southern Legacy Minerals (LCY-V). Southern Legacy’s flagship copper-gold project, AntaKori, lies in the Cajamarca district of northern Peru, 5 km from Gold Field’s (GFI-N) Cerro Corona mine and 30 km from Yanococha, adjacent to Buenaventura’s (BVN-N) Tantahuatay mine. AntaKori has inferred resources of about 5.9 billion pounds of copper equivalent at an average grade of 0.92% copper equivalent and remains open in all directions with about 70% of drill targets still to be tested over epithermal, hydrothermal breccia and skarn targets.

Lupaka Gold contributes its flagship Crucero gold project, including ten additional targets within the project area. An updated resource estimate in March outlined 1.14 million ounces of gold in the measured and indicated category and an additional 0.65 million ounces of gold in the inferred, starting from surface. (The deposit contains 35 million tonnes at an average capped grade of 1.03 grams gold per tonne in the indicated category and 29 million tonnes at an average capped grade of 0.70 gram gold per tonne in the inferred category.) The resource estimate was only based on the A1 zone, one of ten anomalies targeted for follow-up drilling.

If the merger is approved, Lupaka shareholders will own 54.7% of the new company and Andean American shareholders a 45.3% stake.  

Under the plan of arrangement, Andean American shareholders will receive 0.245 shares of Lupaka for each share of Andean American they hold. That represents a 21% premium to Andean American’s 20-day volume weighted average trading price for the period ended July 5.  

“The premium is very attractive—it’s a very reasonable premium for a merger,” Eric Edwards, Lupaka’s president and chief executive, told analysts and investors on a conference call.

The transaction will also launch the combined company with $18.4 million in cash (as of June 30). “The strong cash balance is certainly something that is very important to us,” Edwards noted, adding that it will help fund exploration at Crucero and finance the company “for several years going forward.”

Over the last three years Lupaka has delivered a 50% increase in resources, Edwards added.

“We began trading in June 2011 and at that time we had one project, Crucero, and an ambitious focus to create a Peruvian-based exploration and early-stage development company,” he continued. “Crucero has been very good in terms of delivering exploration results and we’ve been very successful in growing that resource … The properties Andean American holds will create good balance and diversification to our Crucero project.”

In the near-term Crucero will be the exploration priority. Two drills are currently turning on the property and a third drill will arrive at the end of July and start to drill outside the A1 zone (on which the resource estimate is based), on some of the other nine anomalies. “We’re more than the A1 zone,” Edwards declared. “We feel very confident as management that we’ll be able to have significant discoveries in the A3, A4 and A5 zones…Watch this space because up to now we’ve only drilled the A1 zone.”

As for Invicta, the combined company will concentrate on building community relationships to move the project forward. “One community has signed a community agreement, another one is quite close [to doing so], but in another there is quite a lot of work to be done,” Edwards said. “We [now] have the diversification and luxury of having a little time to step away and take a look at community relations … and with a fresh view see how we want to handle the development going forward.”

In terms of liquidity and market presence Edwards noted that the business combination also made sense. “Andean has some institutional coverage that they will be transferring over, but also it has a higher degree of liquidity and retail following. One of Lupaka’s challenges was that [while] shareholders liked the story, it has been a tightly held stock with tight liquidity, and we look forward to bringing in a new group of shareholders.”

As for operating in Peru, Edwards had nothing but good things to say, pointing out that in 2010 mining represented 60% of Peru’s total export revenues, and mining investments the same year brought in $7 billion in foreign direct investment. He also pointed to the fact that about 20% of Peru’s workforce is employed in the mining sector.

“Peru has a long history of stable mining rights and permitting law and we’ve seen the government take steps to protect the contracts in place as well,” Edwards said. “We are encouraged with the Humala government … we’re encouraged with its support of the contracts that have been signed, and see Peru as presenting a great and continued potential for exploration and new discoveries to be had there…We see the government of Peru functioning very effectively; we’ve been able to get our permits [and] renew our permits.”

The two companies have set a reciprocal break fee of $1.15 million but expect the transaction to close as early as September.

At mid-day in Toronto Lupaka was trading at 75¢ within a 52-week range of 80¢-$1.47, while Andean American’s shares were trading at 18.5¢ apiece within a 52-week range of 11¢-67¢.