Iamgold says Euro bid timely

Gold miner Iamgold’s (IMG-T, IAG-n) chief executive, Joseph Conway, says the current economic environment makes the company’s all-cash bid for gold royalty company Euro Ressources (EUR-T, EUR-e) an attractive option for the French company’s shareholders.

“Their share price has held up under the bid for a while,” he says. “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.”

Under the unsolicited takeover offer, first announced in September, Euro shareholders would receive 1.20 euros per share, or $1.79, in cash. Based on Euro Ressources’ 62.5 million fully diluted shares, the bid values the company at 75 million euros or $112 million.

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.”

James Dunnett, Euro’s Vancouver- based director general, told The Northern Miner that he was unable to comment on the offer at presstime, in order to comply with the requirements of the Autorit des Marchs Financiers (AMF), France’s equivalent to the Securities Exchange Commission in the U. S.

The rationale for the bid is the royalty that Euro holds on gold production at the Rosebel gold mine in Suriname, operated by Iamgold. 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. A 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. Conway says the takeover bid is motivated by the impact of Euro’s royalty deal on Rosebel’s profitability.

“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 says. “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, about 100 km south of Paramaribo, Suriname’s capital, hosts reserves of about 4 million oz. gold, and resources (including 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, the mine life is about 13 years, but if the total resource were converted to minable reserves, the mine life would grow to 30 years.

The valuation developed by Iamgold’s financial advisers 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.”

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,” he says. “Our willingness to pay the price that we are offering, which was a 30% premium, reflects that.”

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.

Iamgold’s offer remains open at least until the end of October. The bid is conditional on just over 50% of Euro’s shares being tenered to the deal. Iamgold already owns about 5% of Euro’s shares.

Euro Ressources’ largest shareholder is 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 exchange in Paris, where gold companies are 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’s track record is impressive. The company’s market capitalization has grown from $5 million in 2004 to over $100 million. Its 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.

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.