Gammon scoops up junior gold miner Capital Gold

Mexico-focused Gammon Gold (GAM-T, GRS-N) has offered to buy small-scale gold producer, Capital Gold (CGC-T, CGLD-O), in an all-share deal valued at US$150.5 million.

The deal would see Capital Gold shareholders receive 0.1028 of a Gammon share for each of Capital Gold’s 198 million shares. The exchange ratio values Capital Gold at US76¢ per share.

Both companies have agreed to pay a US$4-million break fee under certain circumstances and Capital Gold has agreed to a non-solicitation period expiring on March 31 when the deal is expected to close.

Capital Gold’s low-cost producing El Chanate gold mine in Sonora state could be beneficial to Gammon Gold, which has been struggling to improve production and bring cash costs down at its existing Ocampo and El Cubo gold mines, located in Chihuahua state and Guanajuato state, respectively.

Capital Gold sold more than 13,000 oz. gold over the period ending Jan. 31 at an average price of US$856 per oz. Total cash costs per oz. sold averaged just US$290 per oz. and Capital was left with a healthy net income of US$3.2 million

Gammon produced 34,000 oz. gold during the third quarter of 2008 bringing total production for the first three quarters to about 110,000 oz. The company achieved a net loss of US$6 million for the quarter but a net income of US$8.4 million for the nine-month period. Cash costs averaged US$735 per gold-equivalent oz. over the third quarter and US$572 per gold-equivalent oz. for the first nine months.

Gammon won’t be releasing its 2008 annual results until March 25, but in its 2008 guidance projection Gammon said it expected to produce 150-160,000 oz. gold and 5.9-6.2 million oz. silver over the year (or 250-265,000 gold-equivalent oz.). Cash costs were projected to fall around US$540-550 per gold-equivalent oz.

Gammon shares rose 43¢ on the news to $9.59 per share when the news was released on March 12, but dropped to $8.46 per share at press time on March 17.

Gammon has a 52-week trading high of $11.10 and a low of $2.68 with 122.4 million shares outstanding.