Iamgold in takeover bid for Euro Ressources

Gold miner Iamgold (IMG-T, IAG-N) has launched an all-cash bid to take over gold royalty company Euro Ressources (EUR-T, EUR-Euronext) for 1.20 euro per share, or $1.79. Based on Euro Ressources’ 62.5 million fully diluted shares, the bid values Euro Ressources at 75 million euro or $112 million. The rationale for the bid is the royalty that Euro holds on gold production at the Rosebel mine in Suriname, operated by Iamgold. The bid is not a done deal, because at presstime Euro’s board had yet to respond, and also because rival bids could surface.

For gold production from soft rock at Rosebel, Euro’s royalty is 10% of the amount by which the gold price exceeds US$300 per oz., while for gold production from hard rock, the royalty is 10% of the amount by which the gold price exceeds US$350 per oz. Royalty of 2%, payable to the government of Suriname, is deducted from gold production. The royalty due to Euro applies to the first 7 million oz. of production, of which 5.65 million oz. was outstanding on June 30. Joseph Conway, Iamgold’s CEO, says that the takeover bid is motivated by the impact that the royalty deal held by Euro has on profitability at Rosebel.

“The deal was struck with a predecessor company about five years ago, when the gold price was very low, and the structure of the deal is quite challenging, particularly at high commodity prices, and it’s costly.” He adds: “In our flagship asset, which is Rosebel, in this current environment (the royalty) adds US$50 (per oz.) to our cash cost. For the whole company, this would be about US$15 per oz.”

The Rosebel mine, located about 100 km south of Paramaribo, Suriname’s capital, has reserves of about 4 million oz. gold, and resources (which include the 4 million oz. of reserves) of about 9 million oz. gold. At its current production of 300,000 oz. gold per year, and based on the 4 million oz. in reserves, mine life is about 13 years, but if all 9 million oz. in resources can be converted to mineable reserves, mine life will grow to 30 years. The valuation developed by Iamgold’s financial advisors uses a higher annual production of 375,000 oz. gold.

Conway says: “We obviously know the investment. It’s a low-risk investment, and it’s an investment in cost reduction, so it prompted us to launch the offer…It gives us more operating flexibility in one of our key assets.”

He believes that the offer is attractive to Euro’s shareholders.

“Their share price has held up under the bid for a while. If there was no offer on the table, I would assert that the share price of Euro would be dramatically different…We think that in this environment in particular it will be well-received,” he says.

Conway believes that the bid represents a win-win situation for both sides.

“For the Euro shareholders it is an attractive premium. It gets them liquidity in an otherwise very volatile and illiquid market. And for the Iamgold shareholders it’s an opportunity to reduce our cost for a very low-risk investment.”

Although Conway says that a rival bid could emerge, he does not consider it very likely.

“I don’t think that any of the conventional operating companies like ourselves would be interested. There is obviously some possibility for the royalty companies (to be interested in Euro)… (but) we know the asset best…Our willingness to pay the price that we are offering, which was a 30% premium, reflects that… So I think (a rival bid) is possible, but unlikely,” he says.

Although Conway could be right, it is possible that a gold royalty company may be able to outbid Iamgold if the royalty company trades at a richer multiple. On the other hand, a rival bid from a royalty company may be a shares-only, or a cash-and-shares deal, which some shareholders may find less attractive in today’s market.

Iamgold’s offer remains open at least until the end of October. The bid is conditional on Iamgold owning at least 50% of Euro plus one share. Iamgold already owns about 5% of Euro’s shares, so for the deal to go ahead, a little more than 45% of Euro’s shares have to be tendered.

Euro Ressources’ largest shareholder is director-general (president) James Dunnett, who owns about 8%. The next largest shareholder is Tocqueville Asset Management, with 7.5%. Besides Iamgold’s stake, most of the balance is held by retail investors in France.

Although the company is listed in Toronto, trading volume on the TSX is low, averaging about 4,000 shares daily. Euro is also listed on the Euronext in Paris, where a gold company is a rarity. Average daily trading volume there is 600,000 shares, attesting to the large shareholder base in France, which will decide the fate of the bid.

Euro Ressources’ track record is impressive. The company’s market capitalization has grown from $5 million in 2004 to over $100 million. The treasury holds US$2 million with little debt, and management projects cash flow to reach US$20 million in 2009, all from the Rosebel royalty. It is no wonder that Euro believes that Rosebel is a “crown jewel” among gold royalties, especially in view of the anticipated long mine life, and a good operator such as Iamgold.

Iamgold’s exploration drilling at Rosebel is poised to grow next year, so it is possible that a portion of the resource could be firmed up and moved to the reserve category, extending mine life.

Besides the Rosebel royalty, Euro also has interests in the Paul Isnard development project in neighbouring French Guiana.