Endeavour Mining 
bids for Avnel Gold

Unless another gold miner like B2Gold (TSX: BTO; NYSE-MKT: BTG) or Randgold Resources (LON: RRS; NASDAQ: GOLD) swoops in with a sweeter offer, the boards of both Endeavour Mining (TSX: AVK) and Avnel Gold Mining (TSX: AVK) have unanimously agreed to merge their two West Africa-focused gold companies.

Endeavour Mining is looking to fill a few gaps in its project and construction pipeline after it finishes building its Houndé gold mine in Burkina Faso and Ity carbon-in-leach gold mine in Côte d’Ivoire, and Avnel’s 80%-owned, development-stage Kalana gold project in southwestern Mali seems the perfect fit, the chief executives of both companies say.

If the deal goes ahead, Kalana would be Endeavour’s second mine in Mali after Tabakoto, 450 km north.

Endeavour’s core construction team has a 10-year history of delivering mine construction projects on time and within budget, including Agbaou in Côte d’Ivoire, Nzema in Ghana and Karma in Burkina Faso. Endeavour plans to pour its first gold at Houndé in the fourth quarter of 2017 and at from the Ity carbon-in-leach expansion in the first quarter of 2019.

An optimized feasibility study released earlier this year on Avnel’s Kalana project, 270 km south of the capital Bamako, and near Mali’s border with Guinea, outlined an 18-year, open-pit mine life recovering 1.82 million oz. gold at an average all-in-sustaining cost (AISC) in the first five years of US$561 per oz., and a US$730 per oz. AISC over the mine’s life.

Drillers at Avnel Gold Mining’s flagship Kalana gold project in southwest Mali in 2015. Credit: Avnel Gold Mining.

Howard Miller, Avnel’s chairman and CEO, says that while the merger will bring his many years in Mali to an end in a deal that is bittersweet, he is confident that Endeavour will carry on his company’s legacy “extremely efficiently and well.

“It seemed to us that it was time to exit,” says Miller, who has raised more than $600 million to fund the exploration and development of 10 mines in Africa, Central Asia and Canada, principally for gold and precious stones.

“In the universe of West Africa operations, Endeavour seemed to us the best one to continue our legacy. They have the ability to build — probably more efficiently than we would — and have the culture and depth of knowledge to meet all of our social and stakeholder ambitions, so I am thrilled with the combination.”

But while Endeavour is an ideal partner, Miller admits that he wasn’t overjoyed with the valuation.

The all-share deal values Avnel at US$122 million, which is a 48% premium to Avnel’s closing share price on the Toronto Stock Exchange on June 28, and a 52% premium to Avnel’s 20-day, trailing volume-weighted average price (VWAP).

Avnel shareholders would get 0.0187 of an Endeavour share for each Avnel share owned, which represents 42¢ per share based on Endeavour’s five-day VWAP ($22.58 per share) on June 28. Avnel shareholders would hold 6.8% of Endeavour’s pro forma share capital.

Miller’s own family trust owns just under 9% of the company’s tightly held shares, while the Elliott Group owns 63.5%, Iamgold (TSX: IMG; NYSE: IAG) holds just over 5% and a U.S.-based shareholder owns 6%.

When asked if he thought the valuation was fair, Miller shot back: “Of course not!” adding that valuation is “partly subjective.

“Three shareholders held 85–90% of the company, so it’s not the type of share structure that the market likes,” he says. “It was a significant premium to the market price, but we felt the market price was undervalued. But no remorse on that. The facts are what they are.”

Miller also points out that while Avnel is a small company with a small team and a single asset, Kalana has “enormous” exploration potential on a “very sizeable” 387 sq. km exploration permit.

In addition to the Kalana main project’s proven and probable reserves of 21.7 million tonnes grading 2.8 grams gold per tonne for 1.96 million contained oz. gold, Avnel has 29 prospects across its large land package — only three of which have been drill tested.

These include its highest-priority exploration target, Kalanako. The Kalanako deposit, 2.5 km northeast of the main Kalana project, has measured and indicated resources of 770,000 tonnes grading 4.61 grams gold for 14,000 oz. gold, calculated at a cut-off grade of 0.9 gram gold and US$1,400 per oz. gold.

When Avnel released the results of the optimized feasibility study in January, the company said it was discussing project debt financing for part of the initial capex to commercial production of US$171 million, and was considering alternatives to advance the project to production. It was also considering contract miners.

Mining saprolite ore in the Salman pit at Endeavour Mining’s Nzema gold mine in Ghana. Credit: Endeavour Mining.

The optimized feasibility study envisions US$1,200 per oz. gold at an after-tax net present value of US$250 million at an 8% discount rate, and a 50% after-tax internal rate of return.

Endeavour plans to redesign and optimize the feasibility study to expand the plant’s capacity, which would increase average annual production and shorten the mine life based on current reserves.

Kalana would become Endeavour’s priority after its Houndé and Ity mines reach commercial production.

“We already have a pretty large mine in Mali so it’s a country that we know pretty well, and we’ve been focusing and seeing our footprint grow in key countries in West Africa,” Endeavour’s de Montessus says. “We see Mali as an important country going forward in terms of gold production.”

This year Endeavour expects to produce between 600,000 and 800,000 oz. gold at AISCs of US$860 to US$905 per oz. gold.