Argonaut, Pediment set to merge

VANCOUVER — In a move designed to create a mid-tier gold producer with a strong portfolio of projects in Mexico, Argonaut Gold (AR-T) is merging with Pediment Gold (PEZ-T) in an all-share transaction.

Argonaut’s key asset is the producing El Castillo gold mine in Durango, which is on track to produce 47,000 oz. gold this year at an average cash cost of US$600 per oz. Pediment is focused on its San Antonio gold project in Baja, which is expected to move through a feasibility study by the end of 2011 and potentially achieve production by 2013.

To acquire Pediment, Argonaut will give each Pediment shareholder 0.625 of an Argonaut share for each share held. Based on Argonaut’s closing price on Oct. 18, the deal implies an offer price of $2.56 for each Pediment share. That price values Pediment at $137.1 million.

The offer also represents a 50.7% premium to Pediment’s closing price on Oct. 18 and a 40.4% premium based on both companies’ 20-day, volume-weighted average share prices. After the merger, Argonaut shareholders will own 63% of the new company, with Pediment shareholders holding the rest.

Peter Mordaunt, a Pediment director, will join the current Argonaut board to create the board for the merged entity. Peter Dougherty, president and CEO of Argonaut, will retain both of those roles in the new company. The boards of both companies have unanimously approved the transaction.

The merger requires approval from a two-thirds majority of Pediment shareholders and a simple majority of Argonaut investors. If it goes through, the resulting company will be able to claim ownership of 3.3 million oz. gold in measured and indicated resources and the potential to produce 150,000 oz. gold annually by 2013.

Argonaut wants Pediment for San Antonio, a gold project that already boasts good economics and a reasonably short timeline to production while also holding expansion potential. Pediment is cur-r ently working through a 40,000-metre drill program at San Antonio, with the goal of significantly increasing the resource.

The current resource at San Antonio is divided between the Main zone, which is also known as the Los Planes deposit, and the South zone, which is also known as the Las Colinas deposit. Drilling is working to expand both deposits and to prove up mineralization in the Intermediate zone, a 600-metre long gap between Los Planes and Las Colinas that saw its first drill holes this year.

Results from the first part of the program expanded the known deposits. For example, drill holes in and around the Las Colinas zone recently returned such results as 22.9 metres of 3.98 grams gold per tonne, 32 metres of 3.65 grams gold and 77.7 metres of 2.06 grams gold.

Now results are coming in from the Intermediate zone drilling and it looks as though mineralization may, indeed, continue through the zone. The best results to date came from hole 227, which cut 39.6 metres grading 2.65 grams gold, starting 165 metres downhole.

If mineralization does continue through the Intermediate zone, then the strike length at San Antonio will grow to 2 km. All of the mineralization at San Antonio is at open-pittable depths.

A preliminary economic assessment of San Antonio, completed in August, found that a heap-leach operation could produce 82,500 oz. gold annually for nine years. The pits would produce 11,000 tonnes of ore daily, all of which would be heap leached. Testwork to date indicates gold recoveries of 50% from the sulphide material and 75% for the oxide and transition ores, but the company says there is much that can still be done to optimize sulphide recoveries.

Based on a gold price of US$900 per oz., the project carries a pretax net present value of US$79 million, using an 8% discount rate, and would generate a 33% internal rate of return. The mine would be able to produce a gold ounce for US$513.

The project currently hosts oxide and transition resources totaling 16 million measured and indicated tonnes grading 0.89 gram gold plus 769,000 inferred tonnes averaging 0.65 gram gold. Sulphide resources add 19 million measured and indicated tonnes grading 1.26 grams gold plus 327,000 inferred tonnes averaging 1.19 grams gold.

Pediment had planned to build the mine in two stages. An initial US$71-million investment would build the oxide operation and major facilities. A second investment of US$27 million in year three would fund the addition of a tertiary crusher for the sulphide material.

It is in funding the capital costs for San Antonio that Pediment wants to merge with Argonaut. Cash flow from its El Castillo mine combined with its cash balance, which stood at US$27.6 million at the end of June, should enable the new Argonaut to fund San Antonio internally.

And cash flow from El Castillo is on the up and up, as Argonaut works through a mine expansion that primarily involves buying larger, more efficient trucks. As the company replaces its 40-ton truck fleet with a fleet of 100-ton trucks plus higher capacity loaders, tonnes mined and placed on the leach pads have increased significantly. Comparing the first six months of 2010 with the first half of 2009, the total tonnes mined has almost doubled to 6.3 million tonnes while gold production has increased to 20,308 oz. compared to 12,389 oz.

The result, for the second quarter of the year, was a net income of US$1.2 million on US$2.7 million in cash flow from the mine.

Argonaut is also working to expand the resource at El Castillo. A two-rig drill program, now in its second phase, has been probing areas to the south and east of the pit. The company says results from the program have increased the mineralized envelope at El Castillo by 500 metres to the south and 400 metres to the east, which almost doubles the size of the zone.

In addition, the company is evaluating potential processing options for the transition and sulphide zone that underlie the oxide resource.

Pediment investors were pleased with the merger news, lifting the company’s share price 53¢ or 31.2% to $2.23, a new high and a big change from its 52-week low of 81¢. Pediment has 48 million shares outstanding or 53 million fully diluted. Argonaut shareholders were less pleased and pushed its share price down 37¢ or 9% to $3.73. Argonaut has a 52-week trading range of 90¢-$4.25, and 56 million shares outstanding or 83 million fully diluted.