Fortuna scooping up Goldrock for US$101M

VANCOUVER — Fortuna Silver Mines (TSX: FVI; NYSE: FSM) has been on the lookout for an acquisition in the Americas, and it found a fit in Goldrock Mines (TSXV: GRM; US-OTC: MFMNF) and its wholly owned Lindero gold-porphyry project, 250 km west of the city of Salta in northwestern Argentina.

On June 7 the companies announced an all-share deal wherein Fortuna would acquire Goldrock for US$101 million. Lindero is considered “shovel ready,” with all major permits in place and an updated feasibility study completed in February.

Under the deal, each Goldrock share will be exchanged for 0.1331 of a Fortuna share, which equates to a $1.08-per-share acquisition value, and represents a 58% premium based on the companies’ June 7 closing prices.

The combined pro-forma ownership would be 89% for Fortuna shareholders and 10.8% for Goldrock shareholders.

“We became acquainted with the project in 2010, when we did initial work — more at the desktop level — and we were quite intrigued,” Fortuna president and CEO Jorge Alberto Ganoza said during a conference call.

“The basic rationale for the transaction is simple. The Lindero project ticks all the boxes. It has the potential to be a high-margin, low-cost operation with a robust internal rate of return. It is straightforward from a mining perspective, and located in a mining-friendly jurisdiction in [Argentina’s] Salta province.”

The feasibility study was prepared by Kappes, Cassiday & Associates, and models US$167 million in initial capital to develop a 12-year, open-pit heap-leach mine.

The 18,750-tonne-per-day operation would crank out nearly 108,000 oz. gold annually at US$777 per oz. all-in sustaining costs. Goldrock’s engineering results indicate a 1.22 strip ratio and 68.3% life-of-mine gold recoveries.

Lindero has proven and probable reserves of 82.5 million tonnes averaging 0.63 gram gold per tonne for 1.68 million contained oz. gold. Meanwhile, measured and indicated resources total 117.3 million tonnes of 0.57 gram gold for 2.14 million contained oz. gold.

For the study, Goldrock had DKT Geosolutions retabulate resources using a lower long-term gold price of US$1,350 per oz. gold.

Lindero’s economic base case assumes a US$1,200 per oz. gold price, and indicates a 26.5% after-tax internal rate of return and US$217-million net present value at a 5% discount rate.

The operation would generate US$46.5 million in annual after-tax cash flow, and feature a two-year capital payback period.

“With respect to the Argentine federal government, we’ve been monitoring [the country] for years and kept a close eye on developments. Our decision back in 2010 to not pursue Lindero mainly owed to our view of [the jurisdiction] at the time,” Ganoza said.

“We are pleased with the changes we’ve seen. We believe that President [Mauricio Macri] is an energetic leader with significant political capital. Early on he has implemented policy changes that have turned the business climate right around,” he added.

The acquisition would add to Fortuna’s production portfolio of the Caylloma silver-gold mine in Peru and the San Jose silver-gold operation in Mexico.

The company produced 1.62 million oz. silver and 9,200 oz. gold during the first quarter at all-in sustaining costs, net of by-product credits, of US$9.39 per oz. silver.

Fortuna estimates that when Lindero hits production its pro-forma revenue mix would be comprised of 35% silver and 55% gold.

The company intends to produce at the project by 2018, based on a 15-month construction period.

Regionally, Goldrock has explored the Arizaro porphyry copper-gold deposit, 3 km southeast of Lindero. Mineralization is hosted within potassic-altered diorites, while the higher-grade, gold-copper intervals are associated with a magnetite breccia.

“One of the things that we like about Lindero is not only the intrinsic value of the asset, but also the opportunities it opens for us,” Ganoza said.

“We want to grow our business, and Arizaro represents an immediate area of opportunity on the project site. [The deposit] has received limited work, but it’s an exciting and legitimate copper-gold target. Once Lindero is up and running, it certainly lowers the threshold for success at Arizaro, in terms of what we would need to discover there.”

BMO Capital Markets analyst Jessica Fung boosted her target price on Fortuna by 43¢ to $8.50 per share after the Goldrock deal was announced, and noted that “a Latin American project should comfort investors, as the company had also looked at projects in Africa, which was a concern in our discussions.”

Fortuna Silver shares have moved in a 52-week range $2.65 to $8.60 per share, and closed at $8.27 at press time.

The company has 130.6 million shares outstanding for a $1-billion market capitalization, and had US$96 million in cash at the end of the first quarter.