Patagonia Gold to become takeover target: Hallgarten

Patagonia Gold (PAT-T, PGD-L), one of the largest landholders in the Argentine province of Santa Cruz and an exploration company that is likely to have three mines in production within the next three years, could be a takeover candidate in the foreseeable future, mining analyst Christopher Ecclestone of Hallgarten argues in a new research report.

The London-headquartered company’s COSE project in the southern Patagonia region is expected to begin generating free cash flow in 2013; its Lomada project is forecast to begin gold production in the fourth quarter; and its flagship Cap-Oeste project, which has yielded strong exploration results, could be in production within two years.

And despite all the bad press about Argentina over the years, Ecclestone argues, “the country still manages to get the pulse racing of mining insiders, with a string of deals continuing to surprise the naysayers out there.”

Among these deals he cites Pan American Silver’s (PAA-T, PAAS-Q) bid for Aquiline, Goldcorp’s (G-T, GG-N) bid for Andean Resources (“a stunning development for a project that had not been on many gold investors’ radars in a country that was regarded as tough going”); Stillwater Mining’s (SWC-N) bid for Peregrine Metals and Yamana Gold’s (YRI-T, AUY-N, YAU-L) bid for Extorre Gold Mines.

“All of these deals were of note for ranging from the hundreds of millions of dollars to the multi-billions, not exactly the type of bets that are laid on the table when governments are perceived to be fickle or rapacious,” he continues.

Patagonia Gold is focused on the Deseado Massif, a Jurassic-age volcanic complex that Ecclestone describes as an area that has “evolved into a hunting ground for those companies seeking out a new epithermal gold-silver mining district,” and Patagonia, he adds, is “the sole near-producing play in the region.”

Other companies and projects in the area include AngloGold Ashanti’s (AU-N) Cerro Vanguardia mine; Goldcorp’s Cerro Negro, Pan American Silver’s Manantial Espejo project; Hochschild Mining (HOC-L) and McEwen Mining’s (MUX-T, MUX-N) San Jose mine and Coeur D’Alene Mines’ (CDM-T, CDE-N) Mina Martha.

About 43% of Patagonia is held by insiders, and while somewhat critical of the company’s track record on executive compensation (excessive) and its “path of minimalist self-promotion,” Ecclestone points out that there aren’t many mining companies of Patagonia’s size that have “such a heavyweight” board, which he describes as including a combination of City of London and mining veterans, and Argentine aristocrats.

The junior’s board includes non-executive chairman Sir John Craven, who recently retired as non-executive chairman of the board of Lonmin (LMI-L, LNMIF-O); deputy chairman Carlos Miguens, currently vice-president of two of the main utility companies in Argentina, and formerly president for 11 years of one of Argentina’s largest brewing companies; and William Humphries, formerly managing director of Brancote Holdings until Meridian acquired Brancote in 2002.

Ecclestone argues that the company’s management seems “intent in getting the cash flow moving to fund the mine build-out, and then funnelling the cash flow back towards a combination of mine build-out and resource expansion to present the market with a fait accompli.”

Patagonia’s Lomada de Leiva project, 48 km southeast of the tourist town of Perito Moreno, is about 30 km from Goldcorp’s Cerro Negro project, and contains 161,347 oz. gold in the indicated category and 73,726 oz. gold in the inferred, at a 0.30 gram gold per tonne cut-off grade. The deposit is all oxidized, and has a low strip ratio of 1.25 to 1.

Its Cose project, about 2.5 km from its flagship Cap-Oeste project, is a small but high-grade deposit 150 metres below surface that contains 34,395 tonnes of 60.06 grams gold per tonne, and 1,933.07 grams silver per tonne for an indicated and inferred resource of about 67,000 oz. gold and 2.1 million oz. silver in the inferred category.

The Cap-Oeste project, 65 km southeast of the town of Bajo Caracoles, contains 734,040 oz. gold and 24.8 million oz. silver in the indicated category and 116,090 oz. gold and 4.0 million oz. silver of inferred, at a 0.30 gram gold per tonne cut-off grade. The company expects to start a prefeasibility study by the first quarter of next year.  

When Patagonia’s La Manchuria deposit is factored in, a low-sulphidation epithermal gold and silver system about 50 km southeast of Cap-Oeste, the company’s total contained metal count reaches 975,513 oz. gold and 27.9 million oz. silver in the indicated category and 288,626 oz. gold and 7.19 million oz. silver in the inferred, Ecclestone estimates.

As for political risk, provincial law trumps federal law when it comes to mining in Argentina, and Ecclestone argues that Santa Cruz province, where Patagonia’s projects are located, should not be confused with the province of Chubut, where the local government has taken a negative stance towards mining.

“The political terrain has been fraught for some miners and benign for others, depending on where they operate in the country,” he writes. “As we have often said, Argentina is 23 different mining jurisdictions. Just as the Fraser Institute surveys split out Quebec and other Canadian provinces and U.S. states, thus the same should be done with Argentina, where each province has its own laws, which generally have more power than Federal laws.”

Ecclestone maintains that that Santa Cruz is one of the benign zones, and notes that in October 2009 the province enacted legislation that created an “Area of Special Interest for Mining,” where mining is encouraged. This area includes Patagonia’s Lomada de Leiva, Cap-Oeste and La Manchuria projects.

And when it comes to Argentina’s local content rules for mine builds, Ecclestone has no sympathy for mining companies that were late in compliance. “Mining companies had fifteen years to boost local content without any pressure, and instead just pushed the envelope on how much they could bring in,” he says. “The tenor of the times changed in 2002, and yet they blithely seemed to ignore this. It is actually more surprising that it took the Argentine government so long to swing around and impose rules.”

Ecclestone concludes that as Patagonia proves up its Cap-Oeste deposit, the company will be eventually taken out at a price of more than 40 pence a share. His 12-month target price on the stock is 50 pence a share. At press time in London, Patagonia was trading at 29.75 pence a share within a 52-price range of 13 pence and 70 pence a share. In Toronto, Patagonia was trading at 40¢ per share within a 52-week range of 35¢ and 90¢.

The London-based analyst reasons that the best takeout price will come after Patagonia expands the resource at Cap-Oeste and completes a scoping study — making the “sweet spot” somewhere between late 2012, or during 2013.