OceanaGold to buy Pacific Rim

OceanaGold (TSX: OGC; US-OTC: OGDCF) is banking on bringing its recent success in the Philippines to El Salvador.

Commercial production at the company’s high-grade Didipio copper-gold mine in the northern Philippines started on April 1, and OceanaGold’s management team thinks its mine-building expertise in Southeast Asia could yield dividends in Central America.

OceanaGold plans to acquire all remaining shares of Pacific Rim Mining (TSX: PMU; US-OTC: PFRMF) in an all-share deal valued at $10 million, so that it can move Pacific Rim’s stalled El Dorado project into production.

El Dorado has been in limbo since 2008, when Pacific Rim Mining halted exploration there after the government dragged its heels on approving the project’s environmental impact statement. The EIS was first submitted to regulatory bodies early in 2006. Changes were requested and those changes were made. The EIS was resubmitted in October 2006, but since then, no progress on permitting has been made. 

In 2009 Pacific Rim filed an arbitration claim with the International Centre for the Settlement of Investment Disputes in Washington, D.C., seeking monetary compensation under El Salvador’s investment law. Pacific Rim filed its statement of claim in March 2013, and the government of El Salvador has until Jan. 10, 2014, to file its statement of claim, after which rebuttals and oral testimony will be heard, likely in mid-2014.

OceanaGold’s CEO Mick Wilkes — who served as general manager of Oxiana’s Sepon gold-copper project in Laos before joining OceanaGold in 2011, and has had experience in other developing countries, such as Papua New Guinea — believes he can bring his skills in nurturing government and community relations and mine building to El Salvador, and possibly negotiate an end to the impasse.

While acknowledging the risk of the investment, OceanaGold’s Toronto-based manager of investor relations Sam Pazuki argues that the dollar amount is “nominal” and that the potential rewards are significant, which he says  “provides us an option on a roughly 1.7 million equivalent oz. gold resource, and it’s high grade. Should everything work out, it would be an operation that would be low cost in a prospective jurisdiction.”

El Dorado is 65 km east, or an hour’s drive from San Salvador along paved roads. It has a measured and indicated resource of 4.28 million tonnes grading 9.42 grams gold per tonne for 1.30 million contained oz. gold and 68.96 grams silver per tonne, for 9.49 million contained oz. silver. Gold-equivalent ounces add up to 1.43 million at a grade of 10.40 equivalent grams gold.

Inferred resources add 839,300 tonnes grading 9.45 grams gold and 70.89 grams silver for 255,000 contained oz. gold and 1.91 million contained oz. silver. Gold-equivalent ounces are 282,400 oz. at 10.47 grams.

A prefeasibility study on one of the project’s six deposits was finished in 2005.

In terms of the political risk — and for comparative purposes — Pazuki points to Goldcorp’s (TSX: G; NYSE: GG) $3.6-billion acquisition in 2010 of the Cerro Negro project after taking over Andean Resources. The assets are both high grade, near surface, low sulphidation and epithermal — but El Dorado is half the size of Cerro Negro and a fraction of the price, while Argentina is a risky place for resource companies.

“If you look at the investments on a dollar per oz. resource,” he writes in an email, “there is a remarkable difference. Add risk, depending on who the analyst is, and there is still a big difference, in my opinion.”

Either way, OceanaGold plans to show the Salvadoran government its track record on corporate social responsibility and mine building. “We’re going to work with the government and work with the communities, and demonstrate what we’ve accomplished in the Philippines,” Pazuki says. “We’ve got strong technical expertise that can go into developing countries, and build mines — and we’re a successful operator that has operated mines for the last 22 years.” In addition to Didipio, Oceanagold operates three gold mines in New Zealand.

Catalysts that might impact the future of the El Dorado project include upcoming presidential elections in March 2014. The major political parties competing in the race are the left-wing (and incumbent) Farabundo Marti National Liberation Front, and the more conservative, right-wing Nationalist Republican Alliance. “We’ll see what happens,” Pazuki says. “If there is a change of government, a new government might put this matter behind them and look to resolve it one way or the other.”

In the meantime, OceanaGold is waiting for approval of its takeover bid from Pacific Rim shareholders. Under the agreement — which was reached unanimously with Pacific Rim’s board of directors — shareholders of Pacific Rim will receive 0.04006 of a common share of OceanaGold for each share they hold in Pacific Rim, or $0.60497 per Pacific Rim share. The offer represents a 50% premium to Pacific Rim’s 20-day, volume-weighted average trading price and a 73% premium to its closing price on Oct. 7.

OceanaGold owns 42.15 million shares of Pacific Rim, or 19.98% of the company.

At the end of the second quarter, OceanaGold had $190 million in core debt on top of mining leases from Caterpillar. Based on current metal prices, the company expects to generate between $400 million and $450 million in free cash flow over the next four to five years. 

Pazuki says the company’s priorities are to pay off debt and strengthen the balance sheet, but it will keep looking for opportunities in Asia and the Americas.