Endeavour Mining (EDV-T) plans to buy Avion Gold (AVR-T) in a $389-million all-stock deal to increase its foothold in West Africa, and expand its annual production to over 450,000 oz. gold in 2015.
Endeavour will provide a US$20-million loan to Avion as part of the plan of arrangement, and the cash-strapped producer can use the loan to resume mill expansion at the Tabakoto property in Mali.
The acquisition values Avion at 88¢ per share, or a 56% premium to its Aug. 7 closing price and a 70% premium over its 20-day volume-weighted average price.
Under the agreement, Avion shareholders will receive 0.365 of an Endeavour share for each share held, and upon completion will own 40% of Endeavour.
Endeavour operates two gold mines: Youga in Burkina Faso and Nzema in Ghana. It is also building the Agbaou gold mine in Côte d’Ivoire, while Avion produces gold at the Tabakoto mine in southern Mali, and is advancing its Houndé project in Burkina Faso and Kofi exploration project in western Mali.
“The proposed acquisition by Endeavour Mining appears to offer reasonable value and would create an appealing mid-tier West African gold producer,” BMO analyst Andrew Breichmanas, who covers Avion, writes in a recent note.
In a joint conference call, Endeavour’s CEO Neil Woodyer explains the company has been looking at Avion for over a year as an acquisition opportunity, recognizing that it would strengthen its portfolio by adding a third producing mine, geographical diversification and exploration upside. As a result, it approached Avion three weeks prior to the deal being announced in early August.
Endeavour’s management estimated consolidated production from Youga and Nzema between 187,000 and 202,000 oz. gold this year, but with Avion’s Tabakoto it expects that to increase by 50% to 282,000 to 304,000 oz. It sees these ounces potentially growing to 450,000 oz. a year in 2015, once the mill expansion at Tabakoto is complete and the Agbaou mine reaches steady production.
In a press release, Avion’s president and CEO John Begeman said the offer provides a “substantial premium and meaningful ownership in a stronger combined West African-focused mining company, with the financial resources to withstand a protracted lull in the capital markets.”
If the deal is approved, Endeavour would have a pro-forma market capitalization of $977 million. Its gold reserves would expand by 31% to 2.8 million oz., and resources by 52% to 6 million indicated and measured oz., and 167% to 3.3 million inferred oz.
At the end of June, Avion had US$36 million in cash and a US$200-million corporate facility.
As part of the deal Endeavour is lending Avion US$20 million to help it double Tabakoto’s mill capacity to 4,000 tonnes per day. The Toronto-based producer ran into trouble earlier this year as civil war raged in the northern half of the country. While the producer continued to mine and mill, it suspended the expansion as the conflict halted contract work and delayed construction supplies. Its share price also took a hit, losing more than half its value since the army mounted a coup attempt in mid-March. With the situation in southern Mali recently stabilizing, Avion is negotiating with the contractors to return to site.
Commenting on the bridge loan, Breichmanas notes it provides Avion a non-dilutive financing, while Endeavour’s strong balance sheet should allow advancement of future growth opportunities.
The loan has an initial term of six months and bears interest at Libor, plus 6%. It is repayable in cash or Avion shares on the initial maturity date. It contains an exchange feature — if approved by the TSX — that would allow Endeavour to convert the principal at any time into Avion shares, at an exchange price of US43¢.
The boards of both companies support the proposal and urge shareholders to vote in favour of the deal.
The transaction requires approval from two-thirds of Avion’s shareholders, and half of Endeavour’s stakeholders.
The deal is expected to close in October, following shareholder and regulatory approvals. Once it does, Avion CEO and another Avion director anticipate joining Endeavour’s board, while another Endeavour director resigns.
Endeavour’s chief operating officer Mark Connelly has elected to step down at the end of August, but will continue as a director. He will be replaced by Adriaan Roux, the company’s former senior vice-president of operations.
Avion has agreed not to solicit other offers, and Endeavour has the right to match competing bids.
If Avion walks away from the deal, it will have to pay a US$11.5-million break fee.
Avion closed the day of the deal’s announcement up 21% at 68¢, while Endeavour shares lost 17% to end at $1.99 apiece.
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