Goldcorp trumps Eldorado’s bid for Andean

Andean Resources (AND-T, AND-A) was thrust into the spotlight in the early hours of Sept. 3 as two offers for the company came in rapid succession.

The first came from Eldorado Gold (ELD-T, EGO-N, EAU-A), an all-share bid that values Andean at $3.4 billion.

Goldcorp (G-T, GG-N) then jumped into the fray by besting the Eldorado offer by $200 million with a share-and-cash offer of $3.6 billion.

Goldcorp’s offer not only benefits from being richer, but also from having the unanimous support of Andean’s board.

But on a conference call, Eldorado’s president and chief executive, Paul Wright, didn’t sound like a man that would be easily deterred.

“We wouldn’t be launching a proposal a day before the Labour Day weekend if we weren’t serious about it. We will keep our options open and you’ll see what we do when we do it,” Wright bristled when asked what the company might do in response to Goldcorp’s bid. Five days later, Eldorado withdrew its bid for Andean.

The mood over on the Goldcorp and Andean joint conference call was decidedly lighter.

Goldcorp’s president and chief executive Chuck Jeannes and Andean’s chief executive Wayne Hubert already know one another from their past mining lives.

“Chuck and I worked together when I was with Meridian and he was with Glamis, and I know Chuck is more than capable to take this over,” Hubert said.

Jeannes denied that the Eldorado offer spurred the Goldcorp bid, and instead said the company’s interest ramped up in mid-July after Andean released bonanza grade results from the Mariana zone at its Cerro Negro gold-silver project in Argentina.

“What prompted our action was the Mariana discovery,” he said. “We always knew it was a high-quality low-cost deposit but it just wasn’t big enough to interest us. But the Mariana discovery changed that and as soon as drill results were announced, we updated our resource model and saw that it did have the potential to be the size of a project we’d be interested in.”

When asked what specific size Goldcorp looks for when evaluating potential acquisition targets, Jeannes said while tonnage was key, cash flow was the most important factor.

“We don’t have specific numbers, if you can get anything above 300,000 to 400,000 oz. per year, it is a meaningful gold producer in the world today,” he said. “But our focus is on cash flow. When you look at a project with cash costs less than US$200 an oz. and capital investment that is very low to worldwide standards, this thing will generate a lot of cash.”

To try and claim such cash flows for itself, Goldcorp’s bid gives Andean shareholders the option to take either 0.14 of a Goldcorp share for each Andean share or cash in the amount of $6.50 per share, or a combination of both.

The company says the cash portion of the offer, however, will be capped at $1 billion.

That represents a premium to Andean’s Sept. 2 closing price of 34% and a 56% premium on the company’s 20-day volume-weighted average price.

Before withdrawing, Eldorado’s Wright trumpeted the merits of his company’s offer of 0.31 of an Eldorado share for each share of Andean. The bid represented a 53% premium to Andean’s 20-day volume- weighted average price and would have given Andean shareholders a larger portion of the merged company.

Eldorado’s proposal could have seen Andean “shareholders holding 25% of Eldorado and that would be accompanied by incredible leverage both to the company as it exists and to the Cerro Negro project itself,” Wright said. “The other offer only represents a 9% stake in the existing entity and that is a significant difference.”

Nonetheless, Goldcorp’s offer is the only one remaining on the table at presstime. Shareholders will vote on it in November. Break fees will be 1% of the offer amount as set by Australian law. Andean is an Australian- based company.

Andean has a 100% stake in the Cerro Negro project, which is situated in the mining-friendly southern province of Santa Cruz.

Part of what has the project so highly sought after is the fact that it hosts a high-grade, near-surface system with extremely low projected cash costs.

A feasibility study completed by Andean envisioned a 2,000-tonne-per- day mill turning out 250,000 oz. gold per year at cash costs of just US$60 per oz.

While Jeannes said the competitive nature of the bidding process prohibited him from releasing specifics on what Goldcorp expects the project to yield, he did say that doubling both the resource base and mill production was reasonable.

“We’re not buying this for a 3 million oz. resource,” he said. “It will grow, and with that there will be a significant expansion of throughput from what is in the current feasibility study.”

As for the deposit itself, Andean’s estimate divides resources into three distinct zones.

The most significant of the three is the Eureka zone which has indicated resources of 3.6 million tonnes grading 12.3 grams gold and 179 grams silver for 1.4 million oz. gold and 20.8 million oz. silver.

The Vein zone has indicated resources of 4.6 million tonnes of 3.73 grams gold for 554,000 oz. gold and the Bajo Negro zone has 1.8 million tonnes in the indicated category of 8.74 grams gold and 24 grams silver for 525,000 oz. gold and 1.4 million oz. silver.

When tallied together with inferred resources, the project has a total resource of 3.06 million oz. gold and 26.68 million oz. silver, but those numbers don’t include results from some 140 recently drilled holes.

As for where Cerro Negro would fit into Goldcorp’s pipeline, the company is currently set to bring its Peasquito gold mine in Mexico into commercial production in the third quarter of 2010.

Next on the timeline is the Pueblo Viejo gold project in the Dominican Republic which is slated to go into production next year. If acquired, Cerro Negro would slot in after that, with production targeted for 2012. That would be followed by production at its Cochenour gold project in Ontario in 2014, while its Eleonore gold project in Quebec and the El Morro copper-gold project in Chile would come online in 2015.