Primero bids for Brigus Gold

VANCOUVER — It’s been just over two years since gold producer Primero Mining (TSX: P; NYSE: PPP) was outbid for the Young–Davidson gold mine in Ontario by AuRico Gold (TSX: AUG, NYSE: AUQ), but the company always maintained that its goal was to become a multi-asset miner through acquisitions. And on Dec. 16, Primero appears to have that milestone in sight with a friendly $220-million bid for Canadian producer Brigus Gold (TSX: BRD; NYSE-MKT: BRD).

Under the offer, Brigus shareholders would receive 0.175 of a Primero share for each share held, as well as a 0.1 share in a spin-out company that would host Brigus’ Goldfields project in Saskatchewan and the Ixhuatan and Huizopa projects in Mexico. The spin-out would start its corporate life with $10 million in cash.

Based on the companies’ closing prices on Dec. 13, the offer values Brigus shares at 91¢ apiece, or a 43% premium to Brigus’ 20-day, volume-weighted average trading price. After closing — planned for  late February 2014 — Brigus shareholders would own a 27% equity stake in Primero.

“The first thing it does is add a high-quality, producing gold mine. If you’ve been following Primero, we’ve been clear in what we’ve been focused on over the past twelve months, and that’s been combining with another company that has cash flow, and using our balance sheet to move forward together,” said Primero president and CEO Joseph Conway during a conference call. “The most important thing here, however, is diversification. We’re essentially taking two companies that were single-asset producers and combining them into a company that has a portfolio we can move forward with.”

Primero’s sole producing asset is the San Dimas underground gold–silver mine in Durango state, Mexico,. It is slated to produce up to 140,000 equivalent oz. gold this year at cash costs of US$630 per oz. The company, with US$126 million in cash at the end of the third quarter, expects to expand the San Dimas mill by early 2014, when  the mine will hum along at 2,500 tonnes per day.

Meanwhile, Brigus had been working towards a similar expansion at its hybrid open-pit, underground Black Fox gold mine in Ontario’s Timmins gold district. The company has been struggling with its cash levels, and was forced to cut back on its expansion expenditures over the past two quarters. Black Fox is scheduled to produce between 95,000 oz. and 105,000 oz. gold this year, at cash costs ranging from US$650 to US$700 per oz.

“I think what we really see here is a new vehicle of a critical scale in mining-friendly jurisdictions. If I look at the . . . Destor–Porcupine fault, as well as our location in Mexico, there are lots of historic development and growth opportunities,” Conway said. “It’s important to recognize the expansion potential amongst the combined asset bases of our two companies.”

According to guidance, the combined company would crank out between 250,000 and 270,000 equivalent oz. gold next year, and could hit  400,000 oz. by 2017.

After the deal Primero would have 160 million shares outstanding, and an estimated $720-million market capitalization.

Brigus had been grappling with repayments on its US$83-million debt load that’s due over the next few years, which Primero could settle due to its sizable cash position.

The combined company will start off with US$40 million in cash, and Conway says Primero is in advanced negotiations with banks for a long-term credit facility to provide more liquidity.

“What we see for both sets of shareholders is a transformational combination. This takes Primero into a diversified play with a good portfolio of high-grade production and development assets. We certainly have the financial position to move forward, and a variety of organic growth opportunities,” Conway said.

Another aspect that Conway focused on during his presentation was the recent exploration by Primero and Brigus. In early December Primero announced it had discovered the Perez vein at San Dimas during underground drilling, where hole 13-002 cut 7.4 grams gold per tonne and 528 grams silver per tonne over 12 metres.

Brigus had been working on its Grey Fox discovery, which is 4 km away from its Black Fox mill. On Dec. 12 Brigus confirmed that Grey Fox was open in all directions when it discovered a hangingwall zone at the target, where hole 13-674 intersected 10 metres of 11.74 grams gold from 164 metres downhole.

“We see exploration potential at all of our projects and mines. If you look at some of the intercept releases by both of us over the last quarter, I think you’ll see they are quite spectacular,” Conway said.

Haywood Securities analyst Kerry Smith, who has a $1.30 price target on Brigus, along with a “buy” rating, noted that the company finished the third quarter with US$21 million in cash. Smith wrote in a Dec. 16 research note that “Primero pounced at an inflection point in Brigus’ operating performance. The market has not yet fully appreciated the dramatic improvements in operating results at [Black Fox], and with the mine now running well, Primero is position to reap the benefits.”

Primero’s shares dropped 6.7%, or 35¢, on 3.3 million shares traded after the announcement, before closing at $4.87 at press time. Brigus jumped 33%, or 21¢ per share, on 20.2 million shares traded, before closing the day at 84¢ per share.

“I would say particularly mention the valuation potential when you look at cash-flow multiples and what we’ll be producing next year. When we look to the opportunity from a scale perspective, it’s substantially above a number of other companies in our peer group, and a lot of these companies have a much higher valuation than we’re looking at,” Conway said.

Brigus chairman and CEO Wade Dawe said in a release that “we are pleased to be combining with another established producer, to diversify and build our financial strength and technical expertise while, at the same time, unlocking value for Brigus shareholders.”