Eyeing some attractive South African gold assets, junior
Under the deal, Bema is offering EAGC shareholders one of its own shares for each EAGC share held. Any of EAGC’s outstanding convertible securities will be good for Bema shares on their original basis. In the end, Bema would issue about 50 million shares to complete the deal, boosting its outstanding shares tally by 19%.
EAGC’s board of directors has unanimously recommended the business combination, which is subject to regulatory and EAGC shareholder approval. The deal also hinges on EAGC’s wrapping up its US$67-million acquisition of Petrex Proprietary. EAGC plans to seek shareholder approval for the deal at a general meeting to be held before year-end.
Clive Johnson, Bema’s president and chief executive officer, calls the merger a “friendly pre-emptive strike,” as EAGC would probably have looked for a merger partner following the Petrex acquisition anyway.
“We wanted to build off the base of what we’ve established at Julietta as a low-cost producer,” Johnson adds. “With our highly liquid paper, we’re on the lookout for a group that may have some good production [and] that wanted to increase their leverage to gold.”
In September, EAGC agreed to buy Petrex, South African-based junior Petra Mining’s holding company, which owns three gold mines in South Africa’s Gauteng province. EAGC expects the acquisition to close around Oct. 25. The company had planned to change its name to Chimera Gold; that plan has been scrapped.
To finance the deal, EAGC has arranged a US$35-million loan facility and US$5-million working capital facility from Standard Bank London. The company has also entered into an agreement with Griffiths McBurney & Partners, BMO Nesbitt Burns and Canaccord Capital to raise about US$40 million by offering 45 million special warrants at C$1.40 apiece. Each special warrant allows the holder to buy, for no additional consideration, one EAGC share plus half of a share purchase warrant. One full warrant is good for one EAGC share at C$1.90 for five years.
EAGC’s plans also call for the issuance of a maximum of 1.75 million options to acquire EAGC shares at C$1.40 apiece to certain of its directors, officers and employees on completion of the acquisition.
Bema has agreed to acquire US$10 million of the special warrants and has an option to acquire another US$10 million worth. The more shares Bema buys under the offering, the lower its acquisition cost will be. Bema will also assume the bank facility once the business combination is done. Bema has considered rolling the loan into a corporate facility to include its existing loan (also with Standard Bank London) for the Julietta mine in far-eastern Russia, which stands at around US$29 million.
Unhedged
As a condition of EAGC’s loan, a put program covers 90% of Petrex’s gold production hedged at a floor price of US$290-300 per oz.; production remains unhedged on the upside.
Petrex’s key asset is its namesake Mining camp in East Rand, South Africa.
The Grootvlei mine comprises four shafts and a metallurgical plant. Total gold production for the year ended June 30 was 60,150 oz. derived from 586,000 tonnes of ore averaging 3.19 grams gold per tonne.
The Nigel gold mine, which includes two shafts and a metallurgical plant, churned out 20,640 oz. gold during the year. Consolidated Moddersfontein Mines’ shaft 9 and 14 chipped in 17,360 oz. gold from 206,000 tonnes running 2.62 grams gold. Petrex’s Skukuza project added another 39,030 oz. from open-pit operations and the surface clean-up of old areas to bring total combined production for the year to 137,180 oz. from more than 1.5 million tonnes of ore. The total cash cost rang in around US$218 per oz.
Grootvlei’s centrally located metallurgical plant processes all the operations’ ore. A recently commissioned circuit has boosted plant capacity 67% to 200,000 tonnes per month. The expansion is expected to boost production in the short term to 200,000 oz. annually.
Grootvlei comes with some environmental baggage. Last year, the government threatened to close the mine after it was found to be polluting a nearby wetland, reports South Africa’s Business Report. A proposal for a 35-km-long channel to divert the water for treatment elsewhere requires government approval. The plan is expected to reduce the company’s current pumping costs by US$2 million and generate an 18-month payback period. Petra’s portion of the cost, which will be shared by the government, would come to around R25 million.
On completing the acquisition, EAGC also inherits any environmental liabilities.
Golden Reefs
Combined, the three mines, referred to as the Golden Reefs, contain proven reserves estimated at 10.6 million tonnes averaging 3.09 grams gold per tonne, equivalent to 1.05 million ounces of contained gold. Another 4.9 million tonnes of probable reserves run 3.41 grams per tonne, equivalent to 538,000 oz. gold.
Plans are in the works for a US$8-million program, including 17 km of new underground development to provide access to new and better-quality reserves. The aim is to boost production to 300,000 oz. per year at a cash cost of about US$165 per oz. by around 2006. No further mill expansion is required. Pre-debt cash flow is pegged at US$20-25 million annually, based on a gold price of US$300 per oz.
The mines are 45 km from Johannesburg in the Witwatersrand Basin, one of the world’s most prolific gold-producing regions.
Double reserves
Bema says the addition of the Golden Reefs material will double its reserves to 2.8 million oz. gold; resources will climb to around 11 million oz. The post-merger company will boast annual production of some 315,000 oz. gold at an operating cost of US$135 apiece. Total cash costs are pegged at US$160 per oz. The move more than doubles Bema’s current production levels.
Bema brings to the table a 79% stake in the Julietta mine, a half-interest in the Refugio heap-leach gold operation in northern Chile, a 24% stake in the Cerro Casale gold-copper porphyry deposit in Chile, the Yarnell gold property in Arizona, and an option to earn a 70% interest in the Monument Bay gold deposit in northeastern Manitoba.
Key among these is Julietta, where production improved considerably late last year. During June, production increased to 13,409 oz. gold and 151,212 oz. silver; the mine processed an average of 430 tonnes of ore per day. The improvement comes after mill modifications in April and May. In its first four years of production, Julietta is expected to pour an annual average of 100,000 oz. gold and 1.7 million oz. silver while processing 400 tonnes of ore per day.
Drilling, combined with surface trenching, appears to have hit some new veins at Julietta, and Johnson says the company is on-track to replace the ounces produced there this year.
Upon completing the merger, Bema will be left with US$70 million in debt and more than 280 million shares outstanding. The company currently has US$24 million in cash on hand.
The respective companies’ shares quickly moved in opposite directions after the news broke on Oct. 7. Bema’s finished the day off 23, or more than 12%, at $1.68 in Toronto; EAGC’s ended 11, or 7.6% higher, at $1.56, on the TSX Venture Exchange.
In other news, Bema and equal partner
An arbitrator ruled that Fluor was “grossly negligent” in managing certain aspects of the construction of the Refugio open-pit mine.
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