Banro, China Gold to team up in the DRC

Just days after saying that a document regarding a possible takeover was a fake, Banro (BAA-T, BAA-X) has announced that it will team up with a Chinese major. 

While details of the document were not forthcoming, the impression was that some significant deal was in the works.

After the TSX halted trading of Banro’s shares – which had been surging thanks to the document – the company issued a statement denying that the document came from its management team, and said only that any possible deals were in the preliminary stages.

Well, perhaps not quite as preliminary as some might think.

On April 20, the company revealed that it had signed a non-binding memorandum of understanding (MOU) with China Gold International Resources Corporation (CCG-T). If consummated, the deal would give Banro access to the stores of capital it will require to meet its aim of establishing a new gold mining district in the eastern Democratic Republic of the Congo (DRC).

While Banro has funding in place for building a smaller mine at Twangiza – construction that is currently 60% compete – finding the capital for its more ambitious phase two development remained an unanswered question.

One of the larger capital expenditures that the second phase envisions is building a hydroelectricity plant that would provide not only enough power for more production at Twangiza, but also for future mines at the three other projects that stretch south from Twangiza along the Twangiza-Namoya gold belt.

While specific dollar values were not released, Banro says the deal does outline an intention to extend the partnership to its other projects.

Banro says the MOU is currently being discussed and that a definitive agreement that outlines the transaction structure and other terms still needs to be negotiated.

“The MOU does not create an obligation on the part of either party to consummate any transaction,” Banro said in a statement. “There is no assurance that any transaction will be consummated.”

Beyond the security of capital that a deal between the two companies would bring, Banro also says having China Gold on board would fast-track development of all of its properties.

China Gold International is an off-shoot of the Chinese state-owned entity China National Gold. The company is the largest gold producer in China and holds roughly 39.3% of China Gold International’s outstanding shares.

In Toronto on April 21 – the day the news was released – China Gold shares were off 3% or 15¢ to $5 on 312,000 shares traded, while Banro shares continued their torrid pace climbing another 8% to $3.51 on 3.4 million shares. Banro’s shares had been trading for $2.35 as recently as April 14.

Commercial production at the Twangiza mine is set to begin in the fourth quarter, and the company currently has US$94 million in cash. Total capex for phase one development at Twangiza is expected to come in at US$69 million.

Prior to the MOU, Banro said the balance of the funds would be used to cover overhead costs and to fund the production ramp-up at Twangiza, as well as exploration programs at its four gold projects.

Those four projects stretch across the 210-km-long Twangiza-Namoya gold belt in the South Kivu and Maniema provinces.

Banro’s original plan was to use cash flows generated from Twangiza to fast-track a second mine at Namoya, at the southern end of the gold belt. The company said it could have a mine at Namoya running within the next two years.

The cash flows from both Namoya and phase one Twangiza, were then earmarked for building the hydroelectric project and phase two development of Twangiza.