Homestake bids for Argentina Gold — American miner to continue due diligence until deal closes

David Copperfield, take a seat. Lucas Lundin, director of Argentina Gold (ARP-V), has pulled off a feat that has surprised many.

After urging shareholders to reject Barrick Gold‘s (ABX-T) failed $5-per-share bid, AG has negotiated an offer from San Francisco-based Homestake Mining (HM-N) worth $7.81 per share, based on the March 5 closing price.

The agreement calls for AG shareholders to receive 0.545 of a Homestake share for each share held. The value of the bid is approximately $300 million. AG has just under 37 million shares outstanding, or 38.5 million fully diluted. Homestake will issue about 21 million shares, representing an 8.8% dilution of its shares.

AG’s principal asset is a 60% interest in the joint-ventured Veladero gold-silver project in the Andean mountains of northwestern Argentina. The project contains a resource equivalent to at least 4.5 million oz. gold and 100 million oz. silver. Barrick owns the remaining 40% in Veladero.

In addition to the Veladero property, AG holds a large, 560,000-ha land package encompassing a good portion of the Argentine side of the El Indio gold belt.

AG’s directors, who collectively hold about 15% of the stock, are unanimous in supporting the arrangement with Homestake. States Ludin: “This is an excellent transaction for Argentina Gold’s shareholders, representing a full and fair price and offering the opportunity to participate in the upside of a well-managed, international gold producer.”

Douglas Leishman, mining analyst with Yorkton Securities, agrees: “It’s a great deal for Argentina Gold shareholders. You have to really congratulate the directors; I didn’t think they would get a better price than what Barrick offered.”

Leishman does not expect there to be any competing bids. “Homestake has certainly eliminated the competition with this bid. I think it has paid a premium price, when you think of the status of the reserves.”

Veladero is still an early-stage project with no defined proven and probable reserves. Situated 390 km northwest of the capital, San Juan, it comprises 13,000 ha along the border with Chile. Barrick’s Pascua project is less than 6 km northwest of Veladero’s northern boundary.

The main target at Veladero is a 4-by-4-km alteration zone coincident with a ridge named Cerro Pelado. This ridge is formed by two large diatreme systems, Cerro Pelado and Filo Federico, which cover more than 10 sq. km of geochemical and geophysical anomalies. Most of the target area is at an elevation above 4,200 metres.

To date, AG has completed 135 (mostly reverse-circulation) drill holes, and, in the process, outlined three principal targets: Filo Federico, Amable and NW.

The consulting firm Watts Griffis & McOuat (WGM) recently provided an update resource estimate of 2.8 million contained ounces gold for the Amable target, and reported separate estimates for the higher-grade and lower-grade material.

The higher-grade resource consists of 10 million tonnes averaging 5.58 grams gold and 47.88 grams silver per tonne in the indicated category, and 4.1 million tonnes grading 4.43 grams gold and 47.88 grams silver in the inferred category.

A lower-grade indicated resource is estimated at 6.2 million tonnes grading 1.43 grams gold and 44.02 grams silver, while a further 2.4 million tonnes grading 1.42 grams gold and 44.02 grams silver are inferred.

A revised estimate for Filo Federico was provided by consulting geologists Giles Peatfield and J.A. Zbeetnoff, who focused on the higher-grade portion, which could serve as a possible starter pit.

The higher-grade indicated resource stands at 10.5 million tonnes grading 2.03 grams gold and 9.3 grams silver, while the inferred resource adds another 9.2 million tonnes grading 2.05 grams gold and 9.4 grams silver.

These resources are within a larger resource of 14.2 million tonnes grading 1.88 grams gold and 11.2 grams silver classified as indicated, and 14.9 million tonnes of 1.83 grams gold and 12.2 grams silver categorized as inferred. The total resource is equivalent to 1.7 million contained ounces gold.

As part of its review, WGM concluded that, based on the current resource base, the Veladero project could be operated independent of any neighbouring operation and that it has potential for expansion. The recent intersection of gold-silver mineralization in holes 100 (91 metres averaging 1.15 grams gold and 11.7 grams silver) and 111 (87 metres averaging 0.61 gram gold and 15.29 grams silver), 600 metres north of the Amable target, not only represents a potential new discovery but suggests that the targets defined to date are part of a much larger gold-bearing system.

“Argentina Gold and its unique Veladero site present a tremendous opportunity for Homestake,” says Jack Thompson, the latter’s president. “Based on recent independent surveys and our own due diligence, we believe the Veladero property is a superb gold asset with exceptional upside potential.”

Homestake has used AG’s drill data to do their own reserve modeling and preliminary pit design, and they are comfortable with the resource numbers. Thompson says Homestake’s own estimates suggest there is perhaps more gold present, with average stripping ratios pegged at 3-to-1. The deposits are open in several directions, and Thompson sees good potential in joining the NW zone with the Filo Federico zone, where two rigs are currently turning.

Core drilling is also expected to have a significant impact on reserves, and the first two diamond drill holes in the high-grade portion of the Amable target indicate an increase in grade.

Only 30% of the Veladero project area has been explored. Thompson says the surface expression of the deposits is subtle and that this suggests “there will be a lot of happy hunting for a long time.”

As part of its due diligence, Homestake has conducted its own sampling and metallurgical tests, while reviewing the legal and land aspects of the project. The company will continue its due diligence until the deal closes.

“This acquisition strengthens our operating base in South America, where we are evaluating the feasibility of expanding our operations at La Falda in Chile with ore from the adjacent Jeronimo deposit. It makes Latin America Homestake’s fourth growth pillar after the U.S., Canada and Australia, without appreciably altering our conservative geopolitical risk profile.”

Homestake sees Veladero as a low-cost, 500,000-oz.-per-year open-pit gold operation with higher-grade ore run through a traditional milling circuit and low-grade material subjected to heap leaching.

Early metallurgical tests suggest milling recoveries of 90% and higher for gold, whereas heap leaching is expected to yield gold recoveries in the high 60s to low 70s. Silver is viewed as a byproduct credit, and initial tests have shown recoveries in the region of 20%. Early projections on capital costs are in the US$400-500-million range.

Homestake is planning an aggressive exploration program and estimates it will take US$30 million to advance the project to feasibility. A US$10-million program, planned for the balance of this year, will bring the project to prefeasibility, followed by engineering and final feasibility in 2000.

Homestake has interests in 16 mines in the U.S., Canada, Australia and Chile. In 1998, the company’s share of production totalled 2.3 million oz. gold and 11.7 million oz. silver, or 2.5 million oz. gold-equivalent, at a cash cost of US$202 per oz. gold-equivalent and a total production cost of US$258 per oz. gold-equivalent. Homestake expects to produce 2.3 million oz. gold in 1999 at a cash cost of US$200 per oz.

Proven and probable reserves at the end of 1998 stood at 19 million oz. gold and 112.8 million oz. silver. The company reported a net loss in 1998 of US$218.3 million (or $1.02 per share), including writedowns and unusual charges totalling US$195 million, compared with a 1997 loss of US$230.6 million ($1.10 per share), which included writedowns and unusual charges of US$159.2 million.

Operations generated US$120 million in cas
h flow last year, compared with US$160 million in 1997. Cash and short-term investments totalled US$299 million at the end of 1998.

The proposed plan of arrangement between Homestake and AG is expected to close in May, subject to the approval of two-thirds of the latter’s shareholders. A shareholders meeting is to be held in the latter part of April. Other significant shareholders include Newmont Mining (NEM-N) and Barrick, each with about 9.9%.

At presstime, AG reported results of two holes (121, 122) drilled at Filo Federico and one drilled at Amable. Holes 121 hit 131 metres of 6.93 grams gold, which includes 68 metres of 12.95 grams, while hole 122 hit 92 metres of 2.86 grams gold, including 16 metres of 3.63 grams. Hole 133 at Amable hit a near-surface intercept of 166 metres of 1.10 grams gold and 46.37 grams silver.