Agnico invests in juniors Belo Sun, Pershimco

Belo Sun Mining (TSX: BSX; US-OTC: VNNHF) got a welcome boost after Agnico Eagle Mines (TSX: AEM; NYSE: AEM) said it would buy a 17.4% interest in the junior for $15 million.

Under the non-brokered private placement, announced after markets closed on May 14, Agnico will buy 62.5 million Belo Sun shares for 24¢ apiece. Proceeds from the deal, expected to close shortly, will help advance Belo Sun’s flagship Volta Grande gold project in Brazil’s Para state.

The junior’s CEO Peter Tagliamonte says Agnico’s investment is a “strong endorsement” in the quality and potential of the company’s flagship project — and analysts agree.

A recent feasibility study envisions Volta Grande as an open-pit operation producing 205,000 oz. annually over a 17-year life. Estimated start-up costs are US$298 million, while cash operating costs are US$618 per oz. gold.

This results in a US$640-million net present value (NPV) and a 26% internal rate of return (IRR), both after taxes, using a US$1,200 per oz. gold price and 5% discount rate. Payback should occur within four years.

“This investment in the Volta Grande project by an operator as seasoned and well-regarded as Agnico Eagle is certainly a validation of the feasibility study issued by Belo Sun in late March 2015,” BMO analyst Brian Quast writes in a note.

Quast says Agnico is paying $15 million for a 17.4% stake in Volta Grande’s large gold reserve of 3.8 million oz. (116 million tonnes of 1.02 grams gold per tonne). This works out to under US$20 per oz. reserves for the major’s share of 661,000 oz.

“It seems that Agnico Eagle has decided that its exploration dollars are better spent on strategic investments, rather than spending them on an internal exploration department,” Quast comments.

Under the deal, Agnico could participate in any of the junior’s future equity financings to keep its ownership. As long as it has a 10% stake, it will have a right to name one director to Belo Sun’s board.

On the same day, Agnico reported it took part in Pershimco Resources’ (TSXV: PRO; US-OTC: RSPRF) $7-million equity raise at 17¢ per share. The major bought 13.2 million shares for $2.2 million. It now holds 52.8 million Pershimco shares, or 19.9% of the company. 

Pershimco intends to use most of the proceeds to develop its Cerro Quema project in Panama, and fund exploration.

A 2014 prefeasibility study indicates a heap-leach gold operation at Cerro Quema by late 2016 at preproduction costs of US$117 million. Over its estimated five-year life, annual production should average 79,000 oz. gold at all-in sustaining costs of US$631 per oz. Cerro Quema has a US$110-million after-tax NPV and a 33.7% after-tax IRR, using US$1,275 per oz. gold at a 5% discount rate.

Agnico, which has a history of supporting juniors, says the recent investments are not a precursor to a bid for either junior.

However, Desjardins Capital Markets analyst Michael Parkin sees the investments leading to an acquisition if “exploration results prove encouraging, and show potential for a sizeable operation.” He says the major would be interested in an operation if it produces a minimum 75,000 to 100,000 oz. gold a year.

“In our opinion, making an early investment allows the company to understand the projects in much better detail, and also dissuades a peer from potentially making a bid,” Parkin writes.

Belo Sun jumped 18% to 26¢ per share at press time, while Pershimco added 9.5% to finish at 23¢ per share.