Orbis Gold spurns Semafo’s advances

A day after the board of directors of Orbis Gold (ASX: OBS) rejected an unsolicited all-cash takeover offer made on the Thanksgiving holiday weekend from Montreal-based Semafo (TSX: SMF; US-OTC: SEMFF), the Australian mining company released an updated scoping study for its Natougou gold project in eastern Burkina Faso.

Both companies have assets in the West African nation: Semafo owns and operates the open-pit Mana mine, which includes the high-grade Siou and Fofina satellite deposits, 200 km west of the capital, Ouagadougou, while Orbis’ open-pit Natougou project is 320 km east of Ouagadougou. 

Orbis says Semafo’s all-cash bid of between A62¢ and A65¢ per share in a deal valued at A$155 million to $162 million undervalues the company, and that Semafo was well aware that it was on the brink of releasing the updated scoping study.  

“Semafo’s proposal has been made prematurely ahead of the company’s imminent release of this update, and with knowledge that the update was imminent,” Orbis charged in a press release. “In the course of discussions leading to the proposal, Semafo declined an invitation to conduct due diligence on Orbis Gold’s assets under Orbis Gold’s standard confidentiality terms, and receive this updated scoping study data when made available.”

Semafo doesn’t see it that way. It argues that its proposal is a 77–86% premium to Orbis’ closing price on Oct. 9 of A35¢ per share and a 68–76% premium to Orbis’ 30-day volume-weighted average price. Its offer also “represents a superior outcome” for Orbis shareholders if the company proceeds with a previously announced US$20-million (A42¢-per-share) private placement with Greenstone Resources LP, Semafo contends. Orbis shareholders are expected to vote on the Greenstone investment at a general meeting on Oct. 24.

In addition, Semafo reasons that there are “a number of risks inherent in developing a greenfield mining project in West Africa,” and that its offer gives Orbis shareholders “the opportunity to avoid these risks, while realizing an immediate and substantial cash premium for their shareholding.”

For now, however, Orbis’ board isn’t budging. It describes Natougou — with a grade of 3.4 grams gold per tonne — as one of the highest-grade open-pit gold deposits known across West Africa, and points to the updated scoping study as proof that Semafo’s takeover proposal is insufficient. 

The study incorporated the results of a drill program earlier this year and an updated resource estimate completed in August. Based on mill throughput capacity of 2 million tonnes per year, a base-case gold price of US$1,300 per oz. and initial capex of US$234 million, Natougou serves up an after-tax net present value at a 5% discount rate of US$533 million and a triple-digit after-tax internal rate of return of 100%. (At a US$1,000 per oz. gold price, the NPV slips to US$236 million and the IRR falls to 52%.) Cash-operating costs were calculated at US$534 per oz. and the payback period is eight months.

Orbis believes that exploration could uncover more resources, as the immediate deposit area remains open beyond the limit of current drilling (the average down-hole depth from all drilling so far has been 82 metres) and a number of hangingwall intersections recorded along the southwest margin of the deposit have not yet been included in the current resource estimate, and are priority drill targets. A third drill target within the immediate proposed mine area, the company says, are “stacked” lodes, or possible flat-lying repeat structures developed at depth below the base of current drilling. Exploration drilling is expected to get under way before November, after the rainy season.

Indicated resources now stand at 7.1 million tonnes grading 5.1 grams gold per tonne for 1.2 million contained oz. gold, and inferred resources at 11 million tonnes averaging 2.3 grams gold per tonne for 0.8 million oz. gold. The resource was based on a 0.5-gram-gold-per-tonne cut-off grade.

The footprint of the open pit would be 1.9 km long by up to 950 metres wide, with mineralization mined from surface to a maximum depth of 100 metres. The strip ratio is expected to be 11.7 to 1 over the 6.7-year mine life. 

Orbis says it has finished more than half of a definitive feasibility study on Natougou and expects to wrap it up by mid-2015. Orbis owns 100% of Natougou but must pay a 1% profit-based royalty to the original permit vendor on any gold sales.

“We have always viewed Orbis to be a high potential takeover target due to its size, economics and discounted valuation,” Tara Hassan of Haywood Securities writes in a research note. “Given the quality of the project and the below-average implied valuation metrics, we expect that Semafo will have to sweeten its bid, or face competition from other interested parties.”

Other companies that might be interested in Orbis, Hassan says, include Nevsun Resources (TSX: NSU; NYSE-MKT: NSU); Iamgold (TSX: IMG; NYSE: IAG); Endeavour Mining (TSX: EDV; US-OTC: EDVMF); B2Gold (TSX: BTO; NYSE-MKT: BTG); and Teranga Gold (TSX: TGZ).

Reg Spencer, an analyst at Canaccord Genuity in Australia, has raised his target price on Orbis from A54¢ to A87¢ per share and says the updated scoping study “has revealed a far more valuable project than we had previously estimated, highlighting what was clearly an opportunistic approach from Semafo.”

He adds that “Orbis is now likely in play, and a vastly improved Natougou could bring other suitors to the table, but at the same time potentially lead to improved financing options, should Orbis opt to develop the project on its own.”

Mergers and acquisitions in the mining sector could be cause for celebration, says London-based Investec Securities. “The fact that corporate activity is increasing in the gold sector is encouraging, as companies clearly see opportunities presented by current weak equity markets,” the analysts wrote in an Oct. 15 client note.